ITC – Reversals under GST

The image summarizes all the important provisions under the GST law requiring Input Tax Credit (ITC) reversal or disallowance.

Rule / Section

Nature of Reversal

When Applicable

Time / Compliance

Rule 37

Payment-based reversal

Supplier not paid within 180 days

Reverse ITC in GSTR-3B; re-avail on payment

Rule 37A

Return filing-based reversal

Supplier fails to file GSTR-3B

Mandatory reversal; re-avail when supplier files return

Rule 38

Banking & NBFC reversal

Banking companies & NBFCs

Monthly option; irrevocable for the financial year

Rule 42

Common ITC (Inputs & Input Services)

Used for taxable as well as exempt supplies

Monthly provisional reversal; annual final adjustment

Rule 43

Capital Goods reversal

Capital goods used for taxable as well as exempt supplies

Monthly reversal during useful life

Section 17(5)

Blocked Credit

Specified goods/services

Permanent disallowance

Rule 18(4) & Rule 44

Switch to exemption or composition

Taxable business becomes exempt or opts for Composition Scheme

Reversal on date of change

 

Additional Important Provisions

Section / Rule

Nature of Reversal

When Applicable

Time / Compliance

Section 17(2) read with Rules 42 & 43

Exempt supplies reversal

Common inputs/input services/capital goods used for exempt supplies

Monthly reversal with annual adjustment

Section 17(5)(c) & (d)

Immovable property restriction

Construction of building/office for own use (other than plant & machinery)

Permanent disallowance

Section 17(5)(h)

Goods lost, stolen, destroyed, written off or gifted

Inventory written off, samples, gifts etc.

Immediate ITC reversal

Section 17(5)(i)

Personal consumption

Goods/services used for personal purposes

Permanent disallowance

Section 18(6)

Sale of capital goods

Capital goods on which ITC was availed are sold/disposed

Pay higher of GST on transaction value or reduced ITC

Section 18(1)(d) & Rule 44

Exempt to taxable transition

Goods/services become taxable after being exempt

Eligible ITC can be availed after prescribed adjustment

Section 18(4) & Rule 44

Cancellation of GST registration

Registration cancelled voluntarily or otherwise

ITC on stock/WIP/capital goods to be reversed

Notification No. 03/2019-CT (Rate) (Annexure I & II)

Residential Real Estate Project (RREP) – new 1%/5% scheme (without ITC)

Promoter opting for new GST scheme (1%/5% without ITC)

Entire ineligible ITC reversed as per Annexure I & II methodology

Section 17(5) read with Real Estate Notifications

Affordable & Residential Flats

Construction of residential apartments taxed at 1%/5% without ITC

ITC not available; reversal wherever applicable

Section 16(2)(aa)

Invoice not reflected in GSTR-2B

ITC claimed without supplier reporting invoice in GSTR-1/IFF

ITC cannot be availed until reflected in GSTR-2B

Section 16(2)(c)

Tax not paid by supplier

Supplier collected GST but failed to deposit it to Government

ITC may be denied/recovered from recipient (subject to legal provisions)

Section 17(1)

Non-business use reversal

Inputs/input services partly used for business and partly for non-business purposes

Proportionate reversal based on usage

Practical Understanding of Each Provision

1. Rule 37 – Non-payment within 180 days

  • ITC must be reversed if supplier is not paid within 180 days from invoice date.
  • ITC can be reclaimed after payment.

Example

  • Invoice: ₹10,00,000 + GST ₹1,80,000
  • Payment not made within 180 days.
  • Reverse ITC of ₹1,80,000.
  • Reclaim after payment.

 

2. Rule 37A – Supplier did not file GSTR-3B

  • If supplier uploads invoice but does not pay tax through GSTR-3B, recipient may have to reverse ITC.
  • ITC can be re-availed after supplier files pending return.

 

3. Rule 38 – Banks & NBFCs

  • Banks/NBFCs may opt to reverse 50% of eligible ITC instead of maintaining detailed records.
  • Option is yearly and irrevocable.

 

4. Rule 42 – Common Inputs

Applicable where common expenses are used for:

  • Taxable supplies
  • Exempt supplies

Examples:

  • Office rent
  • Electricity
  • Audit fees
  • Internet
  • Security services

Monthly provisional reversal with annual adjustment.

 

5. Rule 43 – Capital Goods

Applicable to:

  • Building
  • Furniture
  • Computers
  • Machinery

Used for both taxable and exempt supplies.

Reversal is spread over 60 months.

 

6. Section 17(5) – Blocked Credits

ITC permanently not available on:

  • Motor vehicles (subject to exceptions)
  • Food & beverages
  • Club membership
  • Health insurance (subject to exceptions)
  • Works contract
  • Construction
  • Employee benefits
  • Personal expenses

 

7. Rule 44 / Section 18(4)

Applicable when:

  • Business becomes exempt.
  • Composition Scheme opted.
  • GST registration cancelled.

ITC on:

  • Stock
  • Work-in-progress
  • Finished goods
  • Capital goods

must be reversed.

 

8. Goods Lost / Stolen / Destroyed

ITC to be reversed immediately on:

  • Fire
  • Flood
  • Theft
  • Expired inventory
  • Samples
  • Free gifts

 

9. Personal Consumption

No ITC available for:

  • Personal use of goods
  • Personal travel
  • Household expenses
  • Family consumption

 

10. Sale of Capital Goods

Pay:

  • GST on transaction value or
  • Reduced ITC calculated under Rule 44,

whichever is higher.

 

11. Exempt Supply becomes Taxable

Example:

  • Product was exempt.
  • Later GST imposed.

Business becomes eligible to claim ITC on eligible stock, WIP and capital goods after prescribed adjustments.

 

12. Real Estate (1% / 5% Scheme)

Promoters opting for:

  • Affordable Housing (1%)
  • Residential Housing (5%)

cannot avail ITC and must reverse ineligible credit as per Annexure I & II.

 

13. Section 16(2)(aa)

Invoice must appear in GSTR-2B.
If not reflected, ITC cannot be claimed.

 

14. Section 16(2)(c)

Supplier must actually deposit GST to Government.
Failure may result in denial or recovery of ITC from recipient, subject to judicial interpretations and statutory provisions.

 

15. Section 17(1)

Where inputs are used partly for business and partly for personal/non-business purposes, ITC must be reversed proportionately.

Example

  • Business use: 70%
  • Personal use: 30%

Eligible ITC = 70%
Reversal = 30%

 

Summary Table

Category

Provision

Non-payment to supplier

Rule 37

Supplier failed to file GSTR-3B

Rule 37A

Banking companies

Rule 38

Common Inputs

Rule 42

Capital Goods

Rule 43

Blocked Credits

Section 17(5)

Exempt supplies

Section 17(2)

Personal use

Section 17(1), 17(5)(i)

Goods lost/gifted

Section 17(5)(h)

Registration cancellation

Section 18(4), Rule 44

Sale of capital goods

Section 18(6)

Exempt to taxable transition

Section 18(1)(d)

Invoice not in GSTR-2B

Section 16(2)(aa)

Supplier not paid tax

Section 16(2)(c)

RREP (1%/5%)

Notification 03/2019-CT (Rate) & Real Estate Notifications

 

Disclaimer
This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.