1. Rule 37: Non-Payment to Supplier (180-Day Rule)

The GST law requires businesses to pay their suppliers promptly to retain tax credits.

A recipient fails to pay the supplier the full invoice value (including tax) within 180 days from the invoice date.

Reverse the proportionate ITC in Table 4(B)(2) of Form GSTR-3B.

Re-availment: You can reclaim this ITC once you make the actual payment to the supplier.

2. Rule 37A: Supplier Default in Tax Payment

This rule protects the government from fake credit chains by holding buyers accountable for their suppliers' compliance.

A supplier uploads the invoice in GSTR-1 (so it appears in your GSTR-2B), but fails to file their GSTR-3B and pay the tax by 30th September of the following financial year.

The buyer must reverse this ITC in GSTR-3B on or before 30th November of that succeeding financial year.

Re-availment: You can re-avail the credit after the supplier files their GSTR-3B and discharges the tax liability.

3. Rule 38: Special 50% Reversal for Banks & NBFCs

Banking companies and financial institutions deal heavily with both taxable and exempt services, making detailed tracking complex.

Banks, financial institutions, and Non-Banking Financial Companies (NBFCs) can opt to reverse exactly 50% of their eligible ITC on inputs and input services every month.

This monthly 50% reduction is reported directly in GSTR-3B.

4. Rule 42: Common ITC on Inputs and Input Services

When a business uses the same raw materials, utilities, or services for both business and personal use, or for both taxable and exempt sales, the credit must be split.

Common inputs/input services used for both taxable and exempt supplies (or non-business purposes).

• Monthly Provision: Compute a provisional monthly reversal based on the ratio of exempt turnover to total turnover.
• Annual Adjustment: Calculate the final annual adjustment by September of the following financial year.

5. Rule 43: Common ITC on Capital Goods

Similar to Rule 42, but specifically designed for long-term business assets like machinery, computers, and buildings.

Capital goods used for both taxable and exempt supplies.

• The useful life of any capital good is legally assumed to be 5 years (60 months).
• The ITC is divided by 60 to get a monthly credit value.
• Every month, a portion of that credit is reversed based on that month's exempt turnover ratio.

Annual Adjustment: Final adjustments and recomputations must be finalized by September of the following financial year.

6. Section 17(5): Blocked Credits

Certain expenses are legally barred from ITC eligibility, regardless of whether they are used for business purposes.

Expenses on specified items, including:

• Motor vehicles (with specific passenger capacity exceptions)
• Food and beverages, outdoor catering
• Beauty treatment, health services, health insurance
• Works contract services for constructing immovable property (except plant and machinery)

This ITC is permanently ineligible. If mistakenly claimed, it must be reversed immediately in GSTR-3B and cannot be re-availed.

7. Rule 18(4) & Rule 44: Switching to Exemption or Composition Scheme

When a business stops operating in the regular taxable regime, it can no longer hold active input tax credits.

A registered taxpayer switches from regular taxable supplies to exempt supplies, opts into the Composition Scheme, or faces cancellation of GST registration.

Reverse all ITC attributable to:

• Inputs held in stock
• Inputs contained in semi-finished or finished goods in stock
• Capital goods (reduced by 5 percentage points per quarter from the date of invoice)

Timing: This reversal must be calculated and cleared on the exact date of the operational transition.

Quick Reference Summary

Final Thoughts

Failing to reverse ITC on time can lead to scrutiny from tax authorities, demand notices, and mandatory interest payments. To safeguard your business, ensure your accounting team conducts monthly reconciliations of GSTR-2B against your purchase register, tracks the 180-day supplier payment window, and performs the mandatory annual adjustments every September.