ITC Reversal Rules in GST: When You Must Give Credit Back

ITC reversal means giving back input tax credit you already claimed, by showing it in Table 4(B) of GSTR-3B or paying it through DRC-03. You must reverse when you do not pay a supplier within 180 days, when the supplier never files GSTR-3B, when a purchase serves exempt or personal use, or when the credit is blocked.

Why does the law make you give credit back?

Input tax credit (ITC) is the GST you paid on purchases, which you set off against GST on your sales. It rests on a few promises: you paid for the purchase, the supplier paid the tax to the Government, and you used it for taxable business. When one promise breaks after you have taken the credit, the law asks you to return it. Some reversals are temporary and come back once the problem is fixed. Others are permanent.

The main reversal rules at a glance

Purchases on which you pay tax under reverse charge are outside rule 37, because you paid that tax yourself. Our guide to reverse charge explains those cases.

Rule 37: the 180-day payment rule

Count 180 days from the invoice date. If any part of the bill, including the GST on it, is still unpaid, you reverse the credit in proportion to what is unpaid. Interest under section 50 runs on that amount. When you pay later, you claim the credit again in Table 4(A)(5) and also show it in Table 4(D)(1).

Two things count as paid even without money changing hands: supplies without consideration listed in Schedule I, and amounts added to the value under section 15(2)(b), such as a cost the buyer bore for the supplier.

Rule 37A: when your supplier does not file

Your supplier may file GSTR-1, so the invoice reaches your GSTR-2B, and then never file GSTR-3B, so the tax never reaches the Government. Rule 37A gives the supplier until 30 September after the financial year. If GSTR-3B for that period is still missing, you reverse the credit in a return filed by 30 November. For credit taken in 2025-26, that means reversing by 30 November 2026.

Check your suppliers' filing status in October each year. It is far easier to chase a supplier then than to pay interest later.

Rule 42: common credit on inputs and services

Do you sell anything that is exempt from GST, alongside taxable goods? Then credit on common costs, such as rent, software or advertising, has to be split. The rule works in steps:

1. Credit used only for taxable sales stays in full. Credit used only for exempt sales or for personal use is not taken at all. Blocked credit is left out.
2. What remains is common credit, called C2.
3. The exempt share is D1 = (exempt sales / total turnover in the State) x C2.
4. If common items are also used for non-business purposes, a further 5 percent of C2 is treated as personal use, called D2.
5. Reverse D1 plus D2 in GSTR-3B or through DRC-03.
6. After the year ends, redo the calculation on full-year figures before the due date of the September return. Reverse any shortfall, with interest from 1 April, or claim back any excess.

Rule 43: capital goods

For capital goods, such as a packing machine used for both taxable and exempt goods, credit is taken in full and then spread over a useful life of five years from the invoice date. Each month's share is the credit divided by 60. The exempt part of that monthly share, using the same exempt-to-total ratio, is added to your output tax every month for the five years.

A worked example

Kavita sells dry fruits and packaged snacks online. In March 2026 her common credit on rent, software and marketplace fees is Rs 20,000. Her turnover in the State that month is Rs 10,00,000, of which Rs 2,00,000 is exempt. The exempt share is 2,00,000 / 10,00,000 x Rs 20,000 = Rs 4,000. She reverses Rs 4,000 in Table 4(B)(1) of her March GSTR-3B.

She also bought cartons for Rs 1,18,000, with GST of Rs 18,000, on an invoice dated 1 October 2025. By 30 March 2026, the 180th day, she has paid only Rs 59,000. Half the bill is unpaid, so she reverses Rs 9,000 in Table 4(B)(2) of her March return, with interest. When she pays the rest in May, she claims the Rs 9,000 again.

The exempt and taxable status of each product here is only for illustration. Check the rate of your own goods before you apply the rule.

The mistake sellers usually make

The usual mistake is putting a temporary reversal in the permanent row. If a rule 37 reversal goes into Table 4(B)(1), the portal does not track it as reclaimable, and claiming it back later looks like fresh, unexplained credit. The portal keeps an Electronic Credit Reversal and Re-claimed Statement for Table 4(B)(2) reversals, and it warns you if you reclaim more than its balance.

The second mistake is ignoring rule 42 because exempt sales are small. Even a few exempt products mean a reversal every month. For credit you cannot take at all, see blocked credit under section 17(5). If you find a missed reversal from an earlier month, rectifying GSTR-3B shows the route.

Frequently asked questions

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