GST Reverse

This query is : Resolved

Quick Summary

A kirana store sells exempt unbranded rice and taxable goods. No ITC is claimed on rice purchases. The discussion clarifies that ITC reversal under Rule 42 is required only if common ITC is used for both taxable and exempt supplies. If inputs are exclusively for taxable sales, reversal may not apply.

MITHUN verma

MITHUN verma (Querist)
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09 June 2026 Sir, I would like to ask whether we are still required to reverse GST (ITC reversal) on exempt sales if we report both taxable sales and exempt sales in our GST returns, and also disclose exempt inward supplies in GSTR-3B.

The reason I am asking is that we received a GST notice for FY 2017. At that time, we had reported exempt sales but had not reported exempt purchases. Based on common ITC provisions, we received a notice demanding payment because we had not reversed the proportionate ITC attributable to exempt supplies.

So, if we are now properly reporting exempt inward supplies in GSTR-3B along with exempt sales, are we still required to reverse ITC on exempt sales under the common ITC provisions?

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
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09 June 2026 Yes, ITC reversal is mandatory. The legal obligation to reverse proportionate Input Tax Credit under Section 17(2) and Rule 42/43 depends strictly on having exempt outward sales. Properly reporting exempt inward supplies (purchases) in GSTR-3B fulfills reporting compliance but does not exempt a business from the mandatory requirement to reverse common ITC used to make those exempt sales.

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MITHUN verma

MITHUN verma (Querist)
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09 June 2026 Sir, thank you for your clarification. However, I would like to seek further guidance on my specific case.

We are running a kirana store. Our exempt sales consist only of unbranded rice. The rice is purchased from registered suppliers, but no GST is charged on such purchases, and therefore we do not avail any ITC on rice purchases.

The GST-paid purchases on which we claim ITC are used exclusively for taxable goods, and the corresponding sales are reported as taxable outward supplies.

In this situation, where:

No ITC is claimed on rice purchases,
Exempt sales are only of rice,
GST-paid purchases are linked to taxable sales,

would Rule 42 ITC reversal still be applicable merely because exempt turnover exists? Or can it be argued that there is no common ITC attributable to exempt supplies and therefore no reversal is required?

Kindly clarify with reference to Rule 42 and relevant GST provisions.

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