Case Studies on GST Rule 42 & 43 – Simple Guide to ITC Reversal
If you’re dealing with GST regularly, you’ve probably heard about Rule 42 and Rule 43. At first, they look complicated, but once you understand the logic, they are actually quite simple.
In this article, I’ll explain both rules in a practical way with easy examples.
What is ITC (Input Tax Credit)?
Input Tax Credit (ITC) is the GST you pay on purchases, which you can claim back while filing returns.
However, ITC is allowed only when the purchase is used for taxable business activities.
If the same purchase is used for:
Personal purposes, or
Exempt supplies
then the related ITC cannot be fully claimed. A portion of it must be reversed.
Rule 42 vs Rule 43 (Simple Understanding)
Before going into examples, here’s the basic difference:
Rule 42 → Applies to expenses like rent, electricity, services, etc.
Rule 43 → Applies to capital goods like machinery, laptops, furniture
Rule 42 – ITC Reversal on Expenses
Rule 42 applies when your expenses are used for both:
Taxable supplies
Exempt or non-business purposes
In such cases, ITC should be divided proportionately.
Case Study 1
Let’s say you paid GST of ₹10,000 on business expenses.
Out of this:
70% is used for taxable business
30% is used for exempt activity
So, you can claim only ₹7,000 and the remaining ₹3,000 must be reversed.
Case Study 2 (Common Credit)
Consider this situation:
Total ITC = ₹50,000
Personal use = ₹5,000
Exempt use = ₹10,000
The remaining ₹35,000 becomes common credit.
Now assume:
Exempt turnover = ₹2,00,000
Total turnover = ₹10,00,000
Here, 20% of the common credit relates to exempt supplies.
So, reversal = 20% of ₹35,000 = ₹7,000.
Rule 43 – ITC Reversal on Capital Goods
Rule 43 is slightly different because it deals with long-term assets.
Examples include:
Machinery
Furniture
Computers
Instead of taking full ITC at once, the credit is spread over 5 years (60 months).
Case Study 3
You purchased a machine and paid GST of ₹1,20,000.
This is divided over 60 months:
Monthly ITC = ₹2,000
If 25% of the usage is for exempt supplies:
₹500 must be reversed every month
₹1,500 can be claimed
Case Study 4 (Change in Usage)
Sometimes, an asset is initially used fully for taxable business, but later used partly for exempt supplies.
In such cases, ITC reversal should start from the time the usage changes.
Key Points to Remember
ITC should be reversed if used for exempt or personal purposes
Common credit must be split proportionately
Reversal is calculated monthly and adjusted yearly
It is reported in GSTR-3B (Table 4B)
Simple Formula
Reversal = (Exempt Turnover ÷ Total Turnover) × Common ITC
Final Thoughts
Rule 42 and Rule 43 are not complicated once you understand the concept:
If you use inputs or assets for both taxable and exempt purposes, you should only claim ITC related to taxable use.
The rest must be reversed.
If you found this explanation useful, consider sharing it. More simplified GST topics coming soon.
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