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Rule 42 and 43 of CGST/SGST

What is Rule 42 of CGST/SGST rules? 

Both rule 42 & 43 of CGST/SGST rules relates to ITC reversal. The manner for determining and reversing input tax credit for inputs or input service:-

  1. The input tax credit for incoming inputs or services attributed in part, partly for business purposes and/or in part for other purposes, for making taxable supplies including nil rated supplies and in part for the exemption of supplies, under subsection (1) or subsection (2), is attributable to the business purposes or for the performance of the tax credit for input or input services.
  • Total input tax in the tax period designated as ‘T’ on input and input services;
  • Input tax amount, out of “T,” attributable to inputs and input services intended only for other than business reasons designated as “T1;”
  • The amount of ‘T’ input and input tax attributable only for the provision of the exempt inputs and input services, categorized as ‘T2;’
  • Input tax, under ‘T’ for inputs and input services on which the loans under subsection(5) of section 17, which are categorized under ‘T3,’ are not accessible;
  • Input tax credit credited for the registered person’s electronic credit heading, classified as ‘C1’ and as ‘C1 = T- (T1+T2+T3);
  • The amount of tax credit for inputs and input services intended for the sole purpose of making goods other than exempt but include zero-rated goods referred to as ‘T4;’
  • The invoice level of the registered person should be defined and stated at FORM GSTR-2 as ‘T1,’ ‘T2,’ ‘T3’ and ‘T4;’
  • The input tax credit remained after the input tax credit has been allocated under clause will be referred to as common credit, be referred to as ‘C2’, and be computed as C2=C1-T4
  • The value of the input tax credit for an exempt supply referred to as ‘D1.’D1= (E÷F) × C2 If, during a taxable period, ‘E’ is the cumulative amount of the exempt supply whereas, in the State of the registered person throughout the tax period, ‘F’ is the entire turnover. If no turnover exists for the registered person during that tax period, or the above data is not accessible, the amount of ‘E/F’ should be determined based on the last tax period’s values ‘E’ and ‘F,’ which provide the specifics of such turnover, before the month of calculation of such value.
  • If common inputs and input services are utilized in part for business and part for non-business purposes, the amounts of credit attributable to non-business purposes should be marked with ‘D2’ and equivalent to 5% ofC2;
  • The rest of the common credit should be a non-exempted, but zero-rated input tax credit attributable to the purpose of the company and the effect of supply and be marked as ‘C3’ where C3 = C2 – (D1+D2);
  • The taxpayer should calculate the amount of ‘C3’ in addition to the central, state, Union territorial and integrated tax input tax credit, as well as (m) the sum equivalent to the aggregate ‘D1’ and ‘D2.’ if the input tax on inputs or input services is utilized for purposes other than business and in part.
  • To add to the output tax liability of the registered person an amount equal to the total of ‘D1’ and ‘D2.’ if the input tax on inputs or input services is utilized for purposes other than business.

Rule 42 of CGST/SGST rules state that where the input tax on the input or input services is used partly for other purposes than for business purposes and partly for the exemption of the goods identified and separated at the level of the invoice by the registered person, that amount should also be included into ‘T1’ and ‘T2.’

  1.  The input tax credit as decided by sub-rule (1), should eventually, under the way outlined in the above-mentioned sub-rule, be computed for the financial year before the return is due for September following the end of that financial year.
  • When the total of the sums finally calculated for ‘D1’ and ‘D2’ overrides the sums determined under sub-rule (1) for ‘D1’ and ‘D2,’ that excess shall add to a registered person’s liability for the output tax during September following the end of the business year concerned and the registered person shall add the amount of the output tax liability not later than that of September following the end of the financial year concerned.
  • Where the sum determined under sub-rule (1) exceeds the sum of the amounts defined under ‘D1’ and ‘D2’ concerning the sums finally computed under ‘D1’ and ‘D2.’ The registered person can, in his or her return, claim the excess amount as credit not later than one month after the end of the financial year relating to this credit.

Also read


Reversal of ITC on capital goods

The first stage is to ascertain whether the ITC meets the following criteria:

  • The ITC relates exclusively to capital goods used for non-commercial purposes or to exempt external supplies. (OR)
  • The ITC applies to capital goods exclusively used for the production of supplies other than exempt goods. Note that zero-rated supplies would also be included.

If the ITC comes under the aforesaid category ‘A,’ credit for the same must not be authorized. If the ITC falls in the ‘B’ category above, credit is permitted and sent to an electronic credit record. Five years from the date of invoicing should be the lifespan of the capital items.

If capital goods, as previously noted, were covered by ‘A’ or “B’ and now do not cover either category, the ITC would then be known as ‘Common credit’ or ‘Tc,’ and for every quarter or portion of the period covered by ‘A’ or ‘B,’ 5 percent should be deducted from this common credit.

The life span of the capital goods is 5 years, but our filing period concerns the products supplied in a given month, thus we will find the ITC applicable to 60 months at the first time.

What are the common Notes for Rule 42 & 43 of CGST/SGST Rules?

  • As per rules 42 & 43 of CGST/SGST Rules, if the registered person has no turnover during that tax period, or the aforementioned information is not accessible, the values may be utilized during the last tax period.
  • Thus, the free supply comprises reverse charges, securities transactions, land sales, and the transfer of building, where the complete payment is obtained either by the proper officer after the issue of a completion certificate or after its first possession, whichever is sooner. Thus, it would be necessary to reverse ITCs due to such supplies.
  • Exempt goods here exclude:-
    • Operations/operations indicated in Annex III, except sales of land and building.
    • Provision of services through acceptance of deposits, the extension of loans or advances, where interest or discount is the price. However, if the same is given by a banking firm or a financial institution including an NBFC, the value of these services should be included in the exempted supply.
    • Transportation of commodities by a ship to an area outside India from the customs clearing facility in India.
    • Therefore, ITC due to such supply does not have to be reversed.