Under the Goods and Services Tax (GST) regime, Input Tax Credit (ITC) is one of the biggest benefits for registered taxpayers. However, GST law also mandates reversal of ITC in certain situations. These reversals are commonly referred to as GST reversals.
This article explains all types of GST reversals, relevant sections, rules, and practical understanding in simple language.
What is GST Reversal?
GST Reversal means reduction or repayment of Input Tax Credit already claimed by a taxpayer due to non-compliance with GST provisions or specific conditions mentioned under the GST law.
Major Types of GST Reversals
1. ITC Reversal for Non-Payment to Supplier (Rule 37)
If payment to the supplier is not made within 180 days from the date of invoice:
- ITC availed must be reversed
- Applicable to value + GST
- Interest payable from the date of availing ITC
- ITC can be re-claimed after payment is made
Relevant Provision: Section 16(2) & Rule 37
2. Reversal for Exempt Supplies (Rule 42 & Rule 43)
When goods or services are used for:
- Taxable + Exempt supplies
- Business + Non-business purposes
Proportionate ITC must be reversed.
- Rule 42 – Inputs & Input Services
- Rule 43 – Capital Goods
Example:
If electricity or rent is used for both taxable and exempt supplies, ITC must be reversed proportionately.
3. Reversal of ITC on Blocked Credits (Section 17(5))
Certain ITC is not allowed at all, such as:
- Motor vehicles (with exceptions)
- Food & beverages
- Outdoor catering
- Beauty treatment
- Membership of clubs
- Personal consumption goods
- Works contract for immovable property
If ITC is wrongly claimed on such items, it must be reversed immediately.
4. Reversal Due to Change in Composition Scheme (Rule 44)
When a taxpayer:
- Switches from Regular Scheme to Composition Scheme
ITC must be reversed on:
- Inputs held in stock
- Semi-finished goods
- Finished goods
- Capital goods (after depreciation)
5. Reversal on Cancellation of GST Registration (Rule 44)
On cancellation of registration, ITC must be reversed on:
- Closing stock
- Semi-finished and finished goods
- Capital goods
Reversal is made through Form GSTR-10.
6. Reversal for Personal Use or Non-Business Use (Section 17(1))
If goods or services are used:
- For personal purposes
- For non-business activities
Corresponding ITC must be reversed proportionately.
7. Reversal Due to Mismatch or Ineligible ITC
Reversal required when:
- Supplier has not filed GSTR-1
- Invoice not reflecting in GSTR-2B
- Wrong ITC claimed due to clerical errors
- Duplicate ITC claimed
Such ITC must be reversed voluntarily to avoid penalties.
8. Reversal of ITC on Credit Notes Issued
If a supplier issues a credit note after ITC is availed:
- Corresponding ITC must be reversed
- Adjustment made in GSTR-3B
9. Reversal on Capital Goods Used for Exempt Supplies (Rule 43)
When capital goods initially used for taxable supplies are later used for exempt supplies:
- Remaining ITC must be reversed proportionately
- Useful life considered as 5 years (60 months)
10. Reversal Due to Wrong Classification or Rate Difference
If GST rate is later corrected:
- Excess ITC claimed must be reversed
- Interest applicable if excess credit is utilized
Interest on GST Reversal
Interest is payable when:
- ITC is wrongly availed and utilized
- Non-payment to supplier beyond 180 days
Interest Rate: 18% per annum
How to Report GST Reversals?
GST reversals are reported in:
- GSTR-3B
- Table 4(B)(1) – ITC reversed (Others)
- Table 4(B)(2) – Ineligible ITC
- GSTR-9 – Annual reconciliation
Conclusion
GST reversals play a critical role in ensuring compliance under GST law. Taxpayers must regularly monitor:
- GSTR-2B
- Vendor compliance
- Usage of inputs
- Exempt vs taxable turnover
Timely and accurate reversal of ITC helps avoid interest, penalties, and departmental notices.
Stox N Tax 
Leave a comment