Reversal under section 42 and 43 of cgst Act

Yes, segment-wise treatment is the correct and logical approach, and aligns with how Rule 42 works in principle:

1. Rule 42 Mechanism: ITC reversal is required only on inputs/input services used for exempt supplies. If you can establish direct attribution of inputs to specific segments, reversal is only for the exempt-use portion.

2. Direct Attribution (First Step): Under Rule 42(1)(a) and (b), inputs exclusively used for taxable supplies → full ITC allowed. Inputs exclusively used for exempt supplies → full reversal required. So for your Segment 1 (100% taxable), no reversal. For Segment 2 (100% exempt), full reversal of ITC attributable to that segment.

3. Common Credits (Second Step): For Segment 3 (mixed), the common ITC needs to be split in proportion of exempt turnover to total turnover — this is the pro-rata reversal formula under Rule 42(1)(c) to (f).

4. Documentation is Key: You need a solid cost/purchase attribution system to demonstrate which inputs go to which segment. If attribution is clean and auditable, segment-wise reversal stands. If not, the officer may apply blanket proportionate reversal to all ITC.

5. Section 42/43 Reference: The question refers to old provisions (pre-GST era provisions have been restructured) — under current law, the relevant provisions are Rule 42 and Rule 43 of CGST Rules for inputs/capital goods respectively. Segment-wise reversal is acceptable if supported by records.

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VASIM NEGALUR

Aashok Kumar Sharma

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