ITC Reversal When Goods Become Exempt: Rule 42, Rule 43 & Section 18(4) Formulas
ITC Reversal When Goods Become Exempt: Rule 42, Rule 43 & Section 18(4) Formulas
Comprehensive legal and practical guide for corporate accountants on calculating proportionate ITC reversal on exempt goods, capital asset life rules, and Tally Prime statutory journals.
Who is this for: GST Tax Reversal SOP
Quick Answer: How to Calculate ITC Reversal on Exempt Supplies?
When goods become exempt, reverse common ITC monthly under Rule 42 using the formula D1 = (Exempt Sales ÷ Total Sales) × Common Credit, plus D2 = 5% for non-business use. For wholly exempt stock, reverse input credits and capital asset credits (based on a 60-month useful life) via Form ITC-03 under Section 18(4).
- Rule 42 covers inputs and input services; Rule 43 covers common capital assets.
- Capital goods useful life is statutorily fixed at 60 months (5 years).
- Wholly exempt stock reversals require Form ITC-03 filing on the GST portal.
- TallyPrime Stat Adjustment (Alt+J) posts Rule 42/43 entries directly into GSTR-3B Table 4B.
1. Rule 42 & Rule 43 Statutory Reversal Formulas
Common Credit (C2): Total ITC minus (T1: Non-business + T2: Exempt only + T3: Section 17(5) Blocked + T4: Taxable only)
Exempt Reversal (D1): (Aggregate Exempt Turnover ÷ Total State Turnover) × C2
Non-Business Reversal (D2): 5% of Common Credit (C2)
Net Monthly Reversal: Reported in Table 4B(1) of GSTR-3B return.
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