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.