Introduction

Input Tax Credit (ITC) allows a registered business to claim credit for GST paid on eligible business purchases and expenses. However, where goods or services are used partly for taxable supplies and partly for exempt supplies or non-business purposes, the entire credit may not be available. Rules 42 and 43 of the CGST Rules, 2017 explain how the eligible credit is identified and how the ineligible portion is reversed.

1. Rule 42 — Inputs and Input Services

Rule 42 applies to inputs (such as raw materials) and input services (such as professional or consultancy services). The taxpayer must first separate credit that is clearly eligible or ineligible, and then apportion any common credit used for both taxable and exempt supplies.

In simple terms:

·         Credit used exclusively for non-business purposes is excluded.

·         Credit used exclusively for exempt supplies is excluded.

·         Blocked credit under Section 17(5) is excluded.

·         Credit used exclusively for taxable supplies, including zero-rated supplies, may generally be retained, subject to the law.

·         Common credit is apportioned using the prescribed turnover-based formula.

Illustration: A business has common ITC of ₹1,00,000. Its exempt supplies are ₹20 lakh and its total turnover in the State is ₹1 crore. Ignoring other adjustments for this illustration:

ITC attributable to exempt supplies = ₹1,00,000 × (₹20 lakh ÷ ₹1 crore) = ₹20,000

Therefore, ₹20,000 is attributable to exempt supplies. The final reversal must also account for other applicable components of Rule 42, including non-business attribution where relevant, and the prescribed annual calculation and adjustments.

2. Rule 43 — Capital Goods

Rule 43 applies to capital goods, such as machinery or equipment, when they are used commonly for taxable and exempt supplies. Unlike inputs and input services, common capital-goods ITC is spread over a prescribed useful life of 60 months for the apportionment calculation.

In simple terms:

·         Capital goods used exclusively for taxable or zero-rated supplies: credit may generally be available, subject to the law.

·         Capital goods used exclusively for exempt supplies or non-business purposes: credit is not available to the extent prescribed.

·         Capital goods used commonly: calculate the monthly portion of ITC over 60 months and apportion it using the prescribed exempt-supply turnover ratio.

Illustration: Eligible ITC on common capital goods is ₹1,20,000. The monthly amount for the 60-month calculation is ₹1,20,000 ÷ 60 = ₹2,000. If exempt supplies are 20% of total turnover, the amount attributable to exempt supplies is ₹2,000 × 20% = ₹400 for that month, subject to the detailed requirements of Rule 43.

3. Key Differences

Conclusion

Rule 42 and Rule 43 help ensure that ITC is claimed only to the extent permitted under GST law. Businesses should classify purchases and assets correctly, maintain records of taxable and exempt supplies, and complete the required monthly and annual calculations. Proper compliance can reduce the risk of excess ITC claims, interest and disputes during GST audits or departmental scrutiny.