When and How Is Input Tax Credit Reversed Under GST?

Input tax credit must be reversed when credit already claimed stops qualifying. Rule 37 requires a proportionate reversal where the supplier is not paid within 180 days of the date the invoice was issued. Under Rules 42 and 43, common credit is apportioned between taxable and exempt use and the exempt share is reversed. Under Rule 44, credit on stock and capital goods is reversed when the registered person opts into composition, when its supplies become wholly exempt, or on cancellation of registration.

Input tax credit (ITC) must be reversed in seven situations, governed by Rules 37, 37A, 42, 43 and 44 and Sections 17(5) and 34(2).

• Non-payment to suppliers: Credit is reversed proportionately where the supplier is not paid within 180 days of the date the invoice was issued, under Rule 37.
• Exempt supplies: Credit on inputs and input services used partly for exempt supplies is apportioned and the exempt share reversed, under Rule 42, and under Rule 43 for capital goods.
• Personal or non-business use: Where common inputs and input services are used for business and non-business purposes both, five per cent of common credit is reversed every tax period, under Rule 42(1)(j).
• Blocked credits: Credit taken on food, beverages and motor vehicles and the rest of the Section 17(5) list must be given back, because it was never available.
• Cancellation, composition or exemption: Credit on stock and capital goods is reversed when registration is cancelled, when the registered person opts into composition, or when its supplies become wholly exempt, under Rule 44 with Sections 29(5) and 18(4).
• Supplier has not filed GSTR-3B: Credit is reversed where the supplier reported the invoice but has not filed the return for that period, under Rule 37A and Section 41(2).
• Credit notes: Credit taken on an invoice must be reversed to the extent a supplier later issues a credit note against it, under Section 34(2).

A reversal gives back ITC that the law allowed and that was validly taken under the Section 16 conditions on the facts as they then stood, once those facts change. Some reversals are permanent and some are temporary, and the row of the return in which a reversal is reported depends on which it is. Credit apportioned to exempt supplies under Rule 43, credit given back under Rule 44, and tax excluded by Section 17(5) are never restored. Under Rule 42(2), the Rule 42 monthly reversal is recomputed for the year, and any excess reversed is claimed back as credit. Credit reversed because a supplier was unpaid or has not filed is restored in full when the supplier is paid or files.

Under Rule 37(1) of the CGST Rules, 2017, a recipient who has not paid a supplier within 180 days must reverse the credit taken on the invoice, in an amount "proportionate to the amount not paid to the supplier". The second proviso to Section 16(2) of the CGST Act, 2017 sets "a period of one hundred and eighty days from the date of issue of invoice by the supplier". Neither the arrival of the goods nor the arrival of the invoice starts the period. Rule 37 requires the reversal to be made in the GSTR-3B for the tax period immediately following the 180-day period, with interest under Section 50.

Example: A supplier issues an invoice on 4 May 2026 for ₹4,72,000 plus ₹84,960 of GST, which is ₹5,56,960 in all. The recipient claims the ₹84,960 in its May 2026 GSTR-3B and pays the supplier ₹2,78,480, exactly half, by 31 October 2026, the 180th day. Half the invoice is unpaid, so half the credit, ₹42,480, is reversed in the GSTR-3B for November 2026, together with interest under Section 50. The recipient pays the balance on 9 March 2027 and re-avails the ₹42,480 in its March 2027 GSTR-3B.

Rule 37 does not require a reversal on reverse-charge supplies, Schedule I supplies and additions under Section 15(2)(b):

• Reverse-charge supplies: Rule 37 expressly excludes, in its opening words, supplies on which tax is payable on a reverse charge basis; on those supplies the recipient pays the tax to the Government and not to the supplier.
• Schedule I supplies: Supplies made without consideration under Schedule I are deemed by the first proviso to have been paid for.
• Additions under Section 15(2)(b): Amounts the supplier is liable to pay in relation to the supply, which the recipient has instead incurred, are deemed paid by the second proviso.

Re-availing reversed credit under Rule 37(2)

Rule 37(2) of the CGST Rules, 2017 entitles a recipient to re-avail the reversed credit once it makes the payment, and the third proviso to Section 16(2) of the CGST Act provides the same entitlement. Rule 37(4) provides that the Section 16(4) time limit "shall not apply to a claim for re-availing of any credit … that had been reversed earlier".

Under Rule 37A of the CGST Rules, 2017, a recipient must also reverse credit where the supplier reported the invoice in GSTR-1, "as amended in FORM GSTR-1A if any", or through the invoice furnishing facility, but has not furnished its own GSTR-3B by 30 September following the end of the financial year in which the credit was availed. The recipient reverses the credit in a GSTR-3B filed on or before 30 November following the end of that same financial year. Under the first proviso, where the credit is not reversed by the November date, the amount is payable with interest under Section 50. The reversal is reported in Table 4(B)(2) and the re-availment in Table 4(A)(5), shown again in Table 4(D)(1).

Section 41(2) of the CGST Act, 2017, the enabling provision, requires reversal where "the tax payable whereon has not been paid by the supplier", and under its proviso the credit is restored where "the said supplier makes payment of the tax". The recipient reverses and re-avails under Rule 37A, under whose second proviso the credit is restored where the supplier later "furnishes the return in FORM GSTR-3B for the said tax period", which on its face is a condition of filing and not of payment.

The test under Section 16(2)(c) is whether the tax was paid to the Government. Whether a recipient can be denied credit for a supplier's default, under Rule 37A or under that condition, is in litigation.

Section 17(1) restricts credit to the business share and Section 17(2) restricts it to the taxable share. Rule 42 of the CGST Rules, 2017 prescribes the arithmetic for both on inputs and input services, and Rule 43 governs the apportionment of credit on capital goods over sixty months.

Under Rule 42, input tax used exclusively for non-business purposes, exclusively for exempt supplies, or blocked by Section 17(5) is not credited to the electronic credit ledger. The rest is divided into credit used exclusively for taxable and zero-rated supplies, which is kept in full, and common credit, from which, every tax period, the exempt share is reversed and, where common inputs and input services are also used for non-business purposes, a flat five per cent.

E, the numerator of the exempt ratio, includes:

• Exempt and nil-rated supplies: Supplies wholly exempt from tax and supplies at a nil rate.
• Non-taxable supplies: Supplies outside the charge altogether.
• Reverse-charge supplies made by the registered person: Section 17(3) includes supplies on which the recipient, not the supplier, is liable to pay the tax.
• Transactions in securities: Included by Section 17(3) by name.
• Land and building: Sale of land, and subject to paragraph 5(b) of Schedule II, sale of building.

⚠️ The Explanation at the end of Chapter V of the CGST Rules, 2017 governs the whole Chapter and sets the value at which land and building and securities are included in E. It requires the value of land and building to be taken as the value adopted for paying stamp duty, and the value of a security to be taken as one per cent of the sale value of that security. A business that sells ₹1 crore of securities in a month therefore adds ₹1,00,000 to E, not ₹1 crore. Taking the full sale value instead raises the exempt ratio and overstates D1.

Under Explanation 1(b) to Rule 43, which applies to Rule 42 as well, interest on deposits, loans and advances is excluded from the value of exempt supplies, except for a banking company, financial institution or non-banking financial company engaged in supplying those services. Section 17(4) permits such a body to take fifty per cent of eligible credit each month instead of apportioning, and "the rest shall lapse". The option cannot be withdrawn during the rest of the financial year, and the second proviso excludes tax paid on supplies between two registered persons holding the same Permanent Account Number from the fifty per cent restriction. CBIC clarified in Circular No. 261/07/2026-GST of 26 October 2026 that the exclusion applies only where the supplying registration has also opted for Section 17(4). Under the same circular, once one registration of such a body that accepts deposits or extends loans or advances opts, every registration of that body engaged in those services must comply, and a registration not engaged in them can neither opt nor be required to. Under Rule 38(c), the balance is reversed in GSTR-3B, in Table 4(B)(1) under the circular.

E is the aggregate value of exempt supplies in the tax period and F is the total turnover in the State, not the turnover across every registration the registered person holds. Where there is no turnover in the period at all, Rule 42 requires E and F to be taken from the last tax period for which the figures exist.

Finance Act, 2025, Section 133 inserted paragraph 8(aa) into Schedule III of the CGST Act. It covers the supply of goods warehoused in a Special Economic Zone or a Free Trade Warehousing Zone to any person, before clearance for exports or to the Domestic Tariff Area. Such a supply is neither a supply of goods nor a supply of services. The insertion is deemed to take effect from 1 July 2017, and Section 134 bars any refund of tax already collected that would not have been collected had Section 133 been in force at all material times. Both commenced on 1 October 2025, appointed by Notification 16/2025-Central Tax of 17 September 2025. The Explanation to Section 17(3) excludes Schedule III activities from the value of exempt supply, except paragraph 5 and such paragraph 8(a) transactions as are prescribed. Whether paragraph 8(aa) consequently falls outside that value is not settled, and is a point to take advice on.

Worked calculation: ₹2,74,000 of input tax, ₹13,962 reversed under Rule 42

A printer that paid ₹2,74,000 of GST on its July purchases reverses ₹13,962 of it and keeps ₹2,03,138 for set-off against output tax. Under Rule 42, ₹11,300 used only for non-business purposes, ₹26,700 used only for exempt printing and ₹18,900 blocked outright by Section 17(5), ₹56,900 in all, are not credited to the credit ledger. Of the ₹2,17,100 credited, ₹1,63,400 was used only for taxable supplies and needs no apportionment, leaving ₹53,700 of common credit. Twenty-one per cent of that common credit, ₹11,277, is attributable to exempt supplies and a further five per cent, ₹2,685, is treated as non-business, and only these two amounts, ₹13,962 together, are reversed.

The business is a commercial printer registered in one State, filing monthly, in the tax period July 2026. It prints packaging for taxable customers and also prints exempt educational material, and its common inputs are also used for the proprietor's household printing, which makes D2 applicable. Its exempt turnover for the month is ₹9,66,000 out of a total State turnover of ₹46,00,000, so E ÷ F is exactly 21%.

Clauses (e), (g), (j), (l) and (m) of Rule 42(1) also govern the Rule 42 computation:

• T1, T2 and T3 are not reversals: Rule 42(1)(e) excludes them from C1, so they are no part of the D1 and D2 reversal. Rule 42(1)(g) still requires T1, T2, T3 and T4 to be declared at summary level in GSTR-3B.
• D2 is a flat five per cent, and it is conditional: Rule 42(1)(j) applies only where common inputs and input services are used partly for business and partly for non-business purposes. Where it applies, it sets D2 at five per cent of common credit, whatever the real extent of that use.
• Per-head computation: Rule 42(1)(l) requires C3, D1 and D2 to be computed separately for central tax, State tax, Union territory tax and integrated tax.
• Invoice-level segregation prevails: Input tax identified and segregated at the invoice level is included in T1 and T2, and the remainder in T4, and the proviso to Rule 42(1)(m) thereby excludes it from apportionment.

The annual Rule 42(2) recomputation, due with the September return

The monthly apportionment is provisional, and Rule 42(2) requires it to be recomputed once for the whole financial year. The recomputation must be finalised before the due date for furnishing the return for the month of September following the end of the financial year to which the credit relates. The September deadline does not apply to supplies of services covered by paragraph 5(b) of Schedule II, which is construction of a complex or building: Rule 42(2) excepts them in its opening words, and Rule 42(3) provides a project-by-project recomputation for them instead. Where the final D1 and D2 exceed the monthly figures, the excess is reversed in a GSTR-3B or through Form GST DRC-03 no later than that September month. Under Rule 42(2)(a), interest under Section 50(1) runs from 1 April of the succeeding financial year to the date of payment, whatever month the under-reversal arose in. Where the monthly figures were too high, the excess is claimed back as credit within the same period, and no interest is given on it under Rule 42(2)(b).

Under Rule 43 of the CGST Rules, 2017, credit on a capital asset used for both taxable and exempt supplies is spread over sixty months, and the exempt share of each month's portion is reversed. Rule 43(1) opens "Subject to the provisions of sub-section (3) of section 16", so where depreciation has been claimed on the tax component under the Income-tax Act there is no credit on that component to apportion at all. Input tax on an asset used only for non-business or exempt purposes is not credited, input tax on one used only for taxable or zero-rated supplies is credited in full, and every other asset is common. The input tax on a common asset is credited to the electronic credit ledger in full when it is taken, and one-sixtieth of it is then apportioned each month by that month's exempt-turnover ratio for five years.

The whole ₹4,50,000 of credit on the press is credited to the electronic credit ledger in the month the press is bought. It is then given back as an addition of ₹1,575 to output tax liability in each month, for sixty months, in which the press is used for exempt supplies as well as taxable ones.

Rule 43(1)(g) as it stands reads Te = (E ÷ F) × Tr, and Tr was defined in clause (f), which was omitted in 2020; read with clauses (d) and (e), the amount the formula multiplies is Tm.

Under Rule 42(1)(m), D1 and D2 are reversed in the return or through Form GST DRC-03. Rule 43(1)(h) states only that Te "along with the applicable interest" is added to the output tax liability, and under clause (i) it is declared in GSTR-3B. The Form GST DRC-03 option in Rule 43 appears only in its real-estate sub-rule. The two rules read differently because Rule 42(1)(m) was substituted in 2019 into a return-based reversal and Rule 43(1)(h) was not.

The useful life runs from the date of the invoice, and commissioning the asset does not restart it. A capital good first booked as exclusively exempt or non-business can later be brought into common use; the ineligible credit for the period during which it was not in common use, denoted Tie, is then charged under the first proviso to Rule 43(1)(c) at five percentage points for every quarter or part of a quarter. The clause's own Explanation provides that such an asset does not attract Section 18(4). Te is computed separately for central tax, State tax, Union territory tax and integrated tax before it is declared. The same sixty-month period governs the entitlement to credit on capital goods, where it is computed as a claim.

Credit already taken on stock and capital goods must be paid back under Section 18(4) where a registered person opts to pay tax under the composition scheme or where its supplies become wholly exempt, and under Section 29(5) where its registration is cancelled. An exemption that makes the registered person's supplies wholly exempt triggers a Section 18(4) reversal, as a change of scheme does, and the exemptions made under GST 2.0 can be one; a reduction in rate does not. Rule 44 of the CGST Rules, 2017 sets the amount. Credit on inputs held in stock is computed from the invoices themselves. Credit on capital goods held in stock is pro rata on the remaining useful life in months, taking that life as five years, under Rule 44(1)(b). Under Rule 44(4), the amount forms part of the output tax liability, and the details are furnished in Form GST ITC-03 for a Section 18(4) event and in Form GSTR-10 for a cancellation. Rule 44(2) requires the amount to be determined separately for central tax, State tax, Union territory tax and integrated tax.

Example: A printer opts into the composition scheme with effect from 1 October 2026. On 30 September 2026 it holds inputs on which ₹68,400 of credit was taken, traced to the invoices themselves. It also holds a press on which it took ₹5,32,000 of credit and which it has used for 3 years, 8 months and 20 days, so 15 months of useful life remain once the part month is ignored. The capital-goods amount is ₹5,32,000 × 15 ÷ 60 = ₹1,33,000. Total payable under Rule 44 is ₹2,01,400, declared in Form GST ITC-03 and discharged by debit to the electronic credit or cash ledger.

Section 18(4), Section 29(5), Rule 44(3), Rule 44(5), Section 18(6) and Rule 44(6) also govern a Rule 44 computation, and Rule 44A applies in addition:

• The balance lapses: After the Rule 44 amount is paid, the proviso to Section 18(4) provides that the balance of input tax credit lying in the electronic credit ledger "shall lapse".
• On cancellation, the higher figure is paid: Section 29(5) requires the higher of the credit on stock or the output tax payable on those goods. Under its proviso, capital goods have their own test against the tax on transaction value, whichever is higher.
• Without invoices, market price is used: Where the tax invoices for the inputs held in stock are unavailable, the amount is estimated under Rule 44(3) on the prevailing market price on the effective date.
• A certificate is required for that estimate: Rule 44(5) requires the details furnished under sub-rule (3) to be certified by a practising chartered accountant or cost accountant.
• On a supply of capital goods, the higher figure is paid: On the supply of capital goods, Section 18(6) and Rule 44(6) require the higher of the reduced credit or the tax on transaction value. Where the credit figure is the higher, it forms part of output tax liability under the proviso to Rule 44(6) and is furnished in Form GSTR-1.
• Rule 44A is a transitional rule: It applies only to central tax credit carried forward under Section 140 for the additional duty of customs under Section 3(1) of the Customs Tariff Act, 1975, paid on imported gold dore bar. That credit is restricted to one-sixth. The stock of dore bar, or of gold or jewellery made from it, must itself have been held on 1 July 2017, and the other five-sixths is debited at the time of supply of that metal.

Under the proviso to Section 34(2) of the CGST Act, 2017, which Finance Act, 2025, Section 126 substituted, a supplier's credit note does not reduce the supplier's own GST liability unless the recipient has first reversed the matching credit. The proviso now reads:

"Provided that no reduction in output tax liability of the supplier shall be permitted, if the– (i) input tax credit as is attributable to such a credit note, if availed, has not been reversed by the recipient, where such recipient is a registered person; or (ii) incidence of tax on such supply has been passed on to any other person, in other cases."

A registered recipient may book the credit note and leave the credit in its electronic credit ledger. The supplier is then bearing tax it has already given back commercially. The substituted proviso has been in force since 1 October 2025, the date Notification 16/2025-Central Tax appointed for Sections 126 to 134 of the Finance Act, 2025. The proviso that was replaced contained no reference to the recipient: it barred the reduction only where the incidence of tax and interest had been passed on to another person.

⛔ The recipient is obliged to give credit back only on a credit note issued under Section 34 to reduce the taxable value or the tax, and CBIC distinguishes such a note from a commercial one in Circular No. 251/08/2025-GST of 12 September 2025. A financial or commercial credit note does not reduce the original transaction value of the supply, so the tax charged to the recipient is not reduced either, and the supplier gets no reduction in his own liability from it. CBIC clarifies in that circular that the recipient "will not be required to reverse the Input Tax Credit attributed to the discount provided on the basis of financial/ commercial Credit notes issued by the supplier". Check which kind of credit note was received before reversing anything.

On a Section 34 credit note, the recipient must reverse the credit attributable to it, in Table 4(B) of GSTR-3B. Section 34(2) fixes no period for the recipient. From the October 2025 tax period, the Invoice Management System on the GST portal lets a recipient keep a credit note pending for one tax period, and on accepting it the recipient declares the credit to be reversed, which is limited to the credit actually availed on the original document. For the supplier, Section 34(2) requires the credit note to be declared in the return for the month of issue, and the outer date is 30 November following the end of the financial year in which the supply was made, or the date of filing the annual return, whichever is earlier.

No procedure is now prescribed for the supplier to prove the recipient's reversal. On 1 October 2025, the day the substituted proviso commenced, Circular No. 253/10/2025-GST withdrew Circular No. 212/06/2024-GST, which had prescribed how a supplier evidenced the recipient's reversal for the purposes of Section 15(3)(b)(ii). Finance Act, 2026 substitutes Section 15(3)(b), removing the condition that a post-supply discount be established by an agreement made at or before the supply and linked to specific invoices, and amends Section 34(1) to name such a discount as a ground for a credit note; both take effect from a date yet to be notified.

A supplier that has issued a credit note and refunded the money has no statutory means of obtaining its own tax relief until the buyer reverses the credit, so credit-note reversal is worth writing into the purchase contract as a term.

A blocked credit was never available; a reversed credit was available, was taken, and is being given back. Section 17(5) of the CGST Act lists the supplies on which credit is blocked outright, among them food, beverages and motor vehicles. In the Rule 42 calculation, tax on those supplies is removed as T3 before any amount is credited to the electronic credit ledger, whereas a reversal is a debit against credit that has already been credited.

Blocked credit that was claimed must be given back, and Section 50(3) charges interest if it was also utilised.

The T3 exclusion applies to the Rule 42 calculation and not to the return, in which blocked credit is reported at Table 4(B)(1), and not in Table 4(D). Table 4(A) of GSTR-3B auto-populates from the whole of GSTR-2B, so Section 17(5) credit appears in the return. CBIC clarified in paragraph 4.4 of Circular No. 170/02/2022-GST that the reversal of ineligible credit under Section 17(5) "is required to be made under Table 4(B) and not under Table 4(D)". In paragraph 4.3 E it added that because those details are given in Table 4(B), "no further details of such ineligible ITC will be required to be provided in Table 4(D)(1)".

Proposals to widen the Section 17(5) list remain pending amendments.

A reversal is reported in Table 4(B) of GSTR-3B, and under Circular No. 170/02/2022-GST the sub-row depends on whether the credit can be reclaimed. Reversals "which are absolute in nature and are not reclaimable" are reported in Table 4(B)(1), for which the circular lists, "such as", Rules 38, 42 and 43 and Section 17(5). Reversals "which are not permanent in nature and can be reclaimed in future subject to fulfilment of specific conditions" are reported in Table 4(B)(2), for which Rule 37 and Sections 16(2)(b) and 16(2)(c) are listed in the circular, also as examples. The reversal of any credit availed in an earlier period "because of some inadvertent mistake" is also reported in Table 4(B)(2). A credit that is reclaimed is re-taken in Table 4(A)(5) and disclosed again in Table 4(D)(1), which changes no arithmetic, the net being 4(A) less the total of 4(B)(1) and 4(B)(2). Rule 42(1)(m) permits the amount to be reversed in the return or through Form GST DRC-03, and Rule 42(1)(l) requires it to be split across central tax, State tax, Union territory tax and integrated tax before it is declared. Credit reversed temporarily is reclaimed in a later return, not re-entered as a fresh claim.

Section 50(3) charges interest only where credit was wrongly availed and utilised. Rule 42(2) specifies interest under Section 50(1), running from 1 April of the succeeding financial year. Rule 37 states only "interest payable thereon under section 50" and fixes no start date, so the period is a point to take advice on.

Form GST DRC-03 in place of GSTR-3B: Rule 42(1)(m), for the monthly D1 and D2, and Rule 42(2)(a), for the annual shortfall, provide an express election between the two, so either the return or Form GST DRC-03 discharges those amounts. Outside those two rules, the use of Form GST DRC-03 is a matter of practice. Form GST DRC-03 is used where the return for the tax period has already been filed and the reversal cannot be included in it. It is also used where a payment is made voluntarily before a notice, or in answer to one. A reversal that can still be made in an unfiled GSTR-3B is reported in Table 4(B) of that return, not in Form GST DRC-03.

⚠️ The Table 4(B) sub-row for a Section 34 credit-note reversal is not settled. Under Circular 170, Table 4(B) is divided by whether a reversal can be undone, which would put a credit-note reversal in the permanent row at Table 4(B)(1). The label for Table 4(B)(1) in FORM GSTR-3B is not consistent with that test. FORM GSTR-3B was notified by Notification 10/2017-Central Tax of 28 June 2017. Notification 14/2022-Central Tax of 5 July 2022 then substituted the entry against Table 4(B)(1), to read "As per rules 38, 42 and 43 of CGST Rules and sub-section (5) of section 17". Section 34 is not in it. That label is not a closed list: Circular 170 introduces the Table 4(B)(1) reversals with "such as", and its worked Annexure, issued on 6 July 2022, the day after the substitution, still names only rules 42 and 43 in that row while putting a Section 17(5) amount into it. Take a view on the circular's permanence test, apply it consistently, and record which row was used.

The same reversals are reported again in the annual return, in Tables 7A to 7H of FORM GSTR-9, under the instructions that Notification 13/2025-Central Tax of 17 September 2025 substituted. The substituted instruction lists "reversals required under rule 37, 37A, 38, 39, 42 and 43 of the CGST Rules, 2017" and reversals under Section 17(5), with 7H as the residual row. Under the same notification, credit reversed under Rule 37 or Rule 37A in an earlier year and reclaimed in this one is reported in Table 6H, and any other reclaim in Table 6A1. Table 4(B) of GSTR-3B may be used to fill those rows.

Apart from the Rule 37 and Rule 37A reversals, which are re-availed when the supplier is paid or files, and the Rule 42 monthly figures, which Rule 42(2) requires to be recomputed annually, every reversal is permanent, so a reversal for exempt use or for a credit note should not be entered in Table 4(B)(2).