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Rule 43 CGST Rules Explained: ITC Reversal on Capital Goods

Input Tax Credit (ITC) is one of the most valuable benefits under GST, as it helps businesses reduce their tax burden. However, this benefit comes with conditions especially when capital goods are used partly for taxable supplies and partly for exempt supplies or non-business purposes.

This is where Rule 43 of the CGST Rules, 2017 becomes important. It lays down how much ITC on capital goods must be reversed when they are not used exclusively for taxable business supplies.

In this blog, we explain Rule 43, covering its scope, calculation method, compliance requirements, and common mistakes based on the current law applicable in 2025.

What Is Rule 43 of the CGST Rules?

Rule 43 deals with reversal of Input Tax Credit on capital goods when those capital goods are used:

Partly for taxable supplies, and
Partly for exempt supplies or non-business purposes

Capital goods include items like machinery, equipment, plant, computers, furniture, and vehicles (where ITC is eligible).

Unlike Rule 42 (which applies to inputs and input services), Rule 43 applies only to capital goods.

When Does Rule 43 Apply?

Rule 43 applies only in the following situations:

Capital goods are used for:

Taxable supplies + exempt supplies, or
Business + non-business purposes

Rule 43 does NOT apply if:

Capital goods are used exclusively for taxable supplies, or
Capital goods are used exclusively for exempt supplies (ITC not allowed at all)

Key Concept Under Rule 43: Useful Life of Capital Goods

Rule 43 assumes that capital goods have a useful life of 5 years (60 months).

ITC on capital goods is therefore spread evenly over 60 months, and reversal is calculated monthly based on usage.

Step-by-Step Calculation Under Rule 43

Let’s break the process into simple steps.

Step 1: Identify ITC on Capital Goods used for both exempt and taxable supplies

Determine the total ITC availed on a particular capital good used partly for exempt and partly for taxable supplies

Example:
ITC on machinery used for producing both exempt and taxable supplies = ₹1,20,000

Step 2: Calculate Monthly ITC Portion

Since useful life = 60 months:

Monthly ITC = ₹1,20,000 ÷ 60
= ₹2,000 per month

Step 3: Identify Exempt Turnover Ratio

Calculate the ratio of exempt turnover to total turnover for the tax period.

Example:

Exempt turnover = ₹20,00,000
Total turnover = ₹1,00,00,000

Exempt turnover ratio = 20%

Step 4: Calculate Monthly ITC to Be Reversed

Monthly reversal = Monthly ITC × Exempt turnover ratio

₹2,000 × 20% = ₹400 per month

This ₹400 must be reversed or added to output tax liability for that month.

Where Is Rule 43 Reversal Reported?

As per current GST return structure (2025):

The reversal amount under Rule 43 is included in Table 4B(1)- (As per rules 38,42 & 43 of CGST Rules and section 17(5)) of GSTR 3B
The reversal must be done monthly.

Failure to reverse correctly may result in:

Excess ITC claim
Interest liability
Notices during GST audits

What Happens If Capital Goods Are Sold?

If capital goods on which ITC was availed are sold or disposed of, Rule 44 applies instead of Rule 43.

However, for Rule 43 calculations:

Reversal stops from the month in which the capital good is sold
Remaining useful life is not considered under Rule 43

Common Mistakes Businesses Make Under Rule 43

Many taxpayers face GST notices due to these common errors:

Treating capital goods like regular inputs
Ignoring monthly reversal and adjusting annually
Using estimated ratios instead of actual turnover
Forgetting reversal when exempt turnover arises mid-year
Not maintaining asset-wise ITC tracking

Best Practices for Rule 43 Compliance

To ensure smooth compliance in 2025:

Maintain a separate capital goods ITC register
Track asset-wise ITC and usage
Perform monthly Rule 43 calculations
Reconcile reversals with financial turnover
Use GST automation tools for accurate tracking

Why Rule 43 Matters for MSMEs and Growing Businesses

As businesses scale, they invest more in capital assets like machinery, software, and equipment. Even a small exempt component can trigger long-term ITC reversals over 5 years, making Rule 43 financially significant.

Proper understanding helps:

Avoid interest and penalties
Improve GST audit readiness
Ensure accurate ITC planning

Conclusion

Rule 43 of the CGST Rules ensures fair distribution of ITC on capital goods when they are used for both taxable and exempt purposes. While the calculation may appear complex, breaking it into monthly steps makes compliance manageable.

In 2025, with increased GST scrutiny and data-driven audits, accurate Rule 43 reversal is no longer optional; it's essential. Businesses that track capital goods ITC systematically can avoid disputes and maintain clean GST records.