ITC Reversal Under GST: 180-Day Rule and Rules 42, 43

ITC reversal under GST means giving back input tax credit you have already claimed, because a condition was not met or because the credit relates partly to exempt or non-business use. Reversals are not penalties; they are part of the normal credit mechanism. But a reversal that is missed, or done late, attracts interest and is one of the most common findings in GST audits. This guide covers the 180-day non-payment rule, the rule on suppliers who do not file returns, the common credit formulas in rules 42 and 43 with worked examples, and how to report reversals in GSTR-3B.

Situations that require ITC reversal

Situation	Rule or section	Reversal type
Supplier not paid within 180 days of invoice	Rule 37	Temporary: reclaim on payment
Supplier did not pay tax through GSTR-3B by 30 September of the following year	Rule 37A	Temporary: reclaim when supplier pays
Common inputs and input services used for taxable and exempt or non-business supplies	Rule 42	Permanent, with annual true-up
Common capital goods used for taxable and exempt or non-business supplies	Rule 43	Permanent, monthly over useful life
Blocked credits claimed by mistake	Section 17(5)	Permanent
Goods lost, stolen, destroyed, written off, gifted or given as free samples	Section 17(5)(h)	Permanent
Credit note received from supplier	Section 34 read with IMS	Reduction of ITC
Capital goods sold or removed	Section 18(6)	Pay the higher of reduced ITC or tax on transaction value

The 180-day rule (rule 37)

If you do not pay the supplier the value of supply plus tax within 180 days from the invoice date, you must reverse the ITC proportionate to the unpaid amount in the GSTR-3B for the period in which the 180 days end. When you pay later, you can reclaim the credit. Interest under section 50 applies on the reversed amount if the credit had been utilised, for the period from utilisation to reversal.

The rule does not apply to supplies on which tax is paid under reverse charge, deemed supplies without consideration under Schedule I, or the additions to value under section 15(2)(b) where the recipient pays amounts on behalf of the supplier.

Worked example

A Rajkot manufacturer receives an invoice dated 1 January 2026 for ₹1,00,000 plus 18% GST of ₹18,000, total ₹1,18,000. It claims ₹18,000 ITC in January. 180 days from 1 January 2026 ends on 30 June 2026.

• Case A: nothing paid by 30 June. Reverse ₹18,000 in the June GSTR-3B (filed by 20 July). Pay interest if the credit was utilised.
• Case B: ₹59,000 paid by 30 June (half of ₹1,18,000). Reverse half the ITC: ₹9,000.
• Reclaim: when the balance is paid on, say, 15 August, reclaim the reversed ITC in the August GSTR-3B.

When the supplier does not pay tax (rule 37A)

If a supplier reported an invoice in GSTR-1 (so it appeared in your GSTR-2B) but did not file the GSTR-3B for that period by 30 September of the following financial year, you must reverse the ITC by 30 November of that year. The portal communicates such cases. When the supplier later files the return and pays, you can reclaim. This is why tracking supplier filing status is part of good ITC management.

Common credit reversal for inputs and input services (rule 42)

Rule 42 applies when common inputs and input services are used for both taxable supplies (including zero-rated) and exempt supplies, or for business and non-business purposes. The simplified method is:

1. Start with total ITC for the period (T).
2. Remove ITC used exclusively for non-business purposes (T1), exclusively for exempt supplies (T2) and blocked credits (T3). The remainder is C1.
3. Remove ITC used exclusively for taxable supplies (T4). The remainder is common credit, C2.
4. Reverse D1 = (E / F) x C2, where E is exempt turnover and F is total turnover in the state for the period.
5. Reverse D2 = 5% of C2 where common inputs are also used for non-business purposes.
6. Eligible credit = T4 + C2 minus D1 minus D2.

Worked example

A Chennai company sells taxable goods and also earns exempt income from a small agricultural produce trading line. For a month:

Item	Amount
Total ITC (T)	₹3,00,000
Exclusively for non-business (T1)	₹0
Exclusively for exempt supplies (T2)	₹20,000
Blocked credits (T3)	₹30,000
C1 = T minus T1, T2, T3	₹2,50,000
Exclusively for taxable supplies (T4)	₹1,50,000
Common credit C2 = C1 minus T4	₹1,00,000
Exempt turnover E / total turnover F	₹20,00,000 / ₹1,00,00,000 = 20%
D1 = 20% of ₹1,00,000	₹20,000
D2 (no non-business use)	₹0
Eligible ITC = T4 + C2 minus D1 minus D2	₹2,30,000

Total reversal and ineligible credit: T2 ₹20,000 + T3 ₹30,000 + D1 ₹20,000 = ₹70,000. Check: ₹3,00,000 minus ₹70,000 = ₹2,30,000.

Annual true-up

Rule 42 is applied monthly on that month's turnover, and then recomputed for the whole financial year using annual turnover. Any excess reversal can be reclaimed, and any shortfall is paid with interest, by the due date of the September GSTR-3B of the following year. Monthly ratios can swing in seasonal businesses, so the annual computation matters.

Common credit on capital goods (rule 43)

For capital goods used for both taxable and exempt supplies, the ITC is spread over a useful life of five years (60 months):

1. Monthly common credit Tm = common capital goods ITC / 60.
2. Monthly reversal Te = (E / F) x Tm, using the period's exempt and total turnover.

Worked example

The same company buys a packaging machine used for both taxable and exempt lines, with ITC of ₹6,00,000. Tm = ₹6,00,000 / 60 = ₹10,000 per month. With an exempt ratio of 20%, Te = ₹2,000 per month. Over 60 months, if the ratio stays the same, total reversal is ₹1,20,000. Capital goods used exclusively for exempt supplies get no credit; those used exclusively for taxable supplies get full credit. If a capital good's use changes from exclusive taxable to common, it enters the rule 43 computation for its remaining life.

Reporting reversals in GSTR-3B

Reversal	GSTR-3B table
Rules 38, 42, 43 and section 17(5)	Table 4B(1): permanent reversals
Rule 37, rule 37A and other temporary reversals	Table 4B(2): may be reclaimed
Reclaim of earlier temporary reversals	Table 4A(5), and also shown in Table 4D(1)

The portal maintains an electronic credit reversal and reclaimed statement, with an opening balance declared by taxpayers, that tracks temporary reversals and prevents reclaiming more than was reversed. Keep your own register in sync with it. For the full return flow, see how to file GSTR-3B, and for credit that should never be claimed, see our blocked credits guide.

Accounting entries for reversals

Reversals should be visible in the books, not only in the return. For the 180-day example in Case A: debit "ITC reversed pending payment" (or a similar receivable) ₹18,000 and credit Input CGST ₹9,000 and Input SGST ₹9,000, if the supply was intra-state. On reclaim, reverse the entry. For permanent reversals under rules 42 and 43, debit the relevant expense or cost (for example, cost of exempt supplies) and credit the input tax ledgers, because the reversed credit becomes a cost of the business. Keeping temporary and permanent reversals in separate ledgers makes the GSTR-3B tables and the annual return easier to prepare.

Common mistakes

• Not tracking invoice payment ageing, so 180-day reversals are missed.
• Reversing the full ITC when only part of the invoice is unpaid.
• Forgetting to reclaim after payment.
• Ignoring exempt income such as interest or exempt supplies when computing rule 42 ratios.
• Skipping the annual true-up under rule 42.
• Claiming full credit on common capital goods without rule 43 reversal.
• Reporting temporary reversals in Table 4B(1), which makes later reclaim difficult to track.

Monthly reversal checklist

1. Run a payables ageing report and identify invoices crossing 180 days.
2. Check supplier filing status for invoices in prior years nearing the rule 37A dates.
3. Compute rule 42 and 43 reversals using the month's turnover split.
4. Identify blocked credits and write-offs.
5. Record reclaims for invoices paid after reversal.
6. Report in the correct GSTR-3B tables and update the reversal register.

How Fininvo helps

Fininvo ERP maintains an ITC ledger showing credits available, utilised and lapsed, supports rule 42 and 43 reversals for mixed supplies, and tracks vendor bill ageing so unpaid invoices nearing 180 days are visible. See tax compliance, accounting and pricing.

General information, not tax advice. Reversal formulas and reporting tables change through notifications and advisories; consult your CA.

Frequently Asked Questions

Is interest payable when ITC is reversed under the 180-day rule?

Interest applies if the credit was utilised, from the date of utilisation until reversal. If the credit was never utilised because the ledger balance stayed above it, interest does not apply.

Can I reclaim ITC reversed for non-payment?

Yes. Once you pay the supplier the value and tax, you can reclaim the reversed credit in the GSTR-3B for the period of payment.

Does rule 42 apply if I have only a small amount of exempt income?

Rule 42 applies whenever common credit is used for exempt supplies. Certain items, such as interest on deposits for non-banking businesses, have specific treatment in the definition of exempt turnover; consult your CA for your case.

What is the deadline for the annual rule 42 adjustment?

The annual recomputation must be done by the due date of the September GSTR-3B following the end of the financial year.

Where are temporary reversals reported?

In Table 4B(2) of GSTR-3B. Reclaims go in Table 4A(5) and are also shown in Table 4D(1).