Inward supplies liable to pay RCM by recipient to be included in exempted supply

Inward supplies liable to RCM are not part of exempt supplies for the purpose of rule 42 of CGST Rule.

As per Section 17(3) of the Central Goods and Services Tax (CGST) Act, 2017, input tax credit (ITC) is not available on goods or services or both that are used for the furtherance of exempt supplies. Rule 42 of the CGST Rules, 2017 provides for the reversal of ITC attributable to exempt supplies made by a registered person.

In this regard, it is important to note that inward supplies liable for reverse charge mechanism (RCM) are also included in the exempted supplies for the purpose of calculating ITC reversal under Rule 42 of the CGST Rules. This is because the mechanism of RCM shifts the liability to pay tax from the supplier to the recipient, and the tax paid under RCM is eligible for ITC. However, since the tax paid under RCM is not considered as part of taxable output supply, it falls under the category of exempt supply and is included for the purpose of calculating ITC reversal under Rule 42.

Dear Ramakrishna
I think you query is " The supplier whose Services are under RCM need to taken as Exempted supply for reversal of credit under Rule 42...
So the reply is YES . need to reverse the ITC.

Note As per EXPLANATION under 43(5) of CGST Act , For the purpose of rule 42 its hereby clarified that the Aggregate value of Exempted supply shall exclude: Interest income by way deposit except in case of banking company & Value of supply of services by way of Transportation of goods by vessel from custom station to out of India.(now the same has been taxable)

So there is there is no RCM supply being mentioned.

Thus reversal is required.