Rule 43 – Input Tax Credit Reversal for Capital Goods (CGST Rules, 2017)

November 30, 2025
CGST Rules

Rule 43 prescribes the method for determining eligible ITC and calculating reversal relating to capital goods that are used partly for taxable supplies and partly for exempt supplies. The rule is read together with Section 17(1), 17(2), and 17(5) of the CGST Act, which restrict ITC relating to non-business use, exempt output, and blocked ITC. Rule 43 allocates capital goods ITC over 60 months, and proportionate reversal is required every tax period based on the exempt turnover ratio.

1. Legislative Basis (Sections & Rules Applicable)

Rule 43 draws its authority from the ITC restrictions prescribed under Section 17(1) and 17(2) of the CGST Act, which disallow ITC relating to exempt supplies and non-business use. Section 17(5) additionally blocks ITC on specified capital goods, and Section 16 sets out the eligibility conditions. The rule also links to Section 50 for interest where reversal is delayed.

Legal References

Section 16 – Eligibility & conditions for ITC.
Section 17(1) – Non-business restriction.
Section 17(2) – Exempt supplies restriction.
Section 17(5) – Blocked ITC for capital goods.
Rule 43 – Reversal mechanism for capital goods.
Section 50 – Interest for delayed reversal.

2. What Are Capital Goods for Rule 43 (Section 2(19))

Capital goods are goods whose value is capitalised in the books and used for business operations. Under Rule 43, only those capital goods which satisfy Section 16 conditions and are not blocked under Section 17(5) are eligible for ITC. If capital goods are exclusively used for exempt supplies or non-business purposes, the ITC is not available.

Key Points

Capital goods must be capitalised in books of accounts.
ITC is not available if capital goods fall under Section 17(5).
Exclusive taxable use makes ITC fully eligible.
Exclusive exempt use makes ITC fully ineligible.
Mixed-use capital goods fall under Rule 43 reversal cycle.

3. Initial Treatment of Capital Goods ITC (Rule 43(1)(a)–(c))

When capital goods are procured, the entire ITC enters a pool called A, which represents the total ITC available before allocation. If the capital goods are exclusively used for taxable or exclusively for exempt supplies, allocation is not required. Mixed-use capital goods must undergo the 60-month allocation mechanism.

Components

A: Total ITC on the capital goods.
Tc: ITC on capital goods used exclusively for exempt supplies (ineligible).
Tm: ITC on capital goods used exclusively for taxable or zero-rated supplies (eligible).
Tr: ITC on capital goods whose use changes from exempt to taxable or vice versa.

4. Credit Distribution Over 60 Months (Rule 43(1)(c))

Rule 43 mandates spreading the capital goods ITC over 60 months (five years) from the date of invoice. This evenly distributes the credit since capital goods provide long-term benefits. The monthly credit portion (Tm = A/60) becomes the base for reversal calculations when goods are used for exempt activities.

Allocation Rules

ITC is divided as A/60 per month.
60-month period begins from invoice month.
No reduction is allowed for partial months.
If goods are sold before 60 months, balance ITC reversal applies.
Capital goods under Section 17(5) remain fully ineligible.

5. Monthly Reversal Mechanism for Mixed Use (Rule 43(1)(d))

If capital goods are used for both taxable and exempt supplies, the rule requires proportionate reversal every month based on the exempt turnover ratio. The reversal amount is added to output tax liability through GSTR-3B for that month.

Reversal Formula

Tm = A/60 (Monthly eligible portion before applying ratio).
Te = (Exempt Turnover / Total Turnover) × Tm.
Te is the amount to be reversed each month.
Remaining portion becomes eligible ITC for that period.
Reversal is made in GSTR-3B Table 4(B)(1).

6. Change of Use – Switching from Taxable to Exempt or Vice Versa (Rule 43(1)(e)–(f))

If capital goods initially used for taxable supplies are later used for exempt supplies (or vice versa), Rule 43 requires reworking the eligible and ineligible portions. The remaining useful months in the 60-month cycle must be recalculated, and reversal or eligibility is recomputed accordingly.

Key Rules

When taxable-use goods shift to exempt use, remaining ITC becomes ineligible.
When exempt-use goods shift to taxable use, remaining ITC becomes eligible.
Computation is based on remaining months out of 60.
Reversal or re-credit must reflect in GSTR-3B.
Detailed working papers must be retained for audit and scrutiny.

7. Sale / Disposal / Destruction of Capital Goods (Section 18(6) + Rule 43)

When capital goods are sold before 60 months, the taxpayer must pay the higher of the GST on transaction value or the ITC attributable to remaining months. This ensures the business does not retain excess benefit from unused periods.

Obligations

Apply Section 18(6) for disposal.
Pay higher of:
- GST on transaction value, or
- ITC attributable to remaining useful life.
Remaining useful life is taken as months left out of 60.
Applicable even for scrapping, destruction, or transfer.

8. Interaction Between Rule 42 and Rule 43

Rule 42 handles the reversal of inputs and input services, whereas Rule 43 handles capital goods. When a business has mixed supplies (taxable + exempt), both rules apply simultaneously. Rule 42 governs immediate ITC impact, while Rule 43 spreads ITC reversal over 60 months.

Combined Characteristics

Rule 42 = inputs & input services.
Rule 43 = capital goods.
Both link to Sections 17(1), 17(2), and 17(5).
Rule 42 uses monthly C1 calculation, Rule 43 uses A/60.
Annual adjustment applies only to Rule 42, not Rule 43.

9. Numerical Illustration (Rule 43 Pure Example)

A business purchases a capital good for Rs. 12,00,000 + GST 18% = Rs. 2,16,000 ITC. It is used for both taxable and exempt supplies. The monthly allocated credit is Rs. 2,16,000 / 60 = Rs. 3,600. If exempt turnover is 20% of total turnover, then reversal for that month = 20% × 3,600 = Rs. 720.

Summary

Total ITC A = 2,16,000
Tm = 3,600 per month
Exempt ratio = 20%
Te = 720 monthly reversal
Net eligible = 3,600 – 720