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A Guide to Input Tax Credit Reversal Procedures in GSTR-3B and GSTR-2

This article details the conditions and procedures for Input Tax Credit (ITC) reversal under India's Goods and Services Tax (GST) framework. It outlines scenarios requiring reversal in GSTR-3B and provides a historical overview of ITC reversal mechanisms in GSTR-2. Key amendments from Budget 2025 regarding credit notes and GSTR-2B generation are also covered, along with detailed calculations for reversals related to exempt supplies, personal use, and capital goods.

📖 4 min read read🏷️ Input Tax Credit Reversal

The Goods and Services Tax (GST) regime allows businesses to claim credit for taxes paid on inputs (purchases) against the taxes they owe on outputs (sales). To qualify for this benefit, certain conditions must be met. These include:

  • Making payment to the supplier within 180 days of the invoice date.
  • Ensuring inputs and capital goods are not utilized for personal consumption.
  • Confirming that inputs and capital goods are not used for providing exempt supplies.

If these criteria are not satisfied, claiming input tax credit (ITC) on taxes paid for inputs is not permissible. Since these purchases are typically reflected in GSTR-2A and GSTR-2B, taxpayers are required to reverse the input tax credit on such acquisitions when filing their GSTR-3B. Historically, this was managed through Form GSTR-2 until August 2017, after which GSTR-3B became the primary form for this purpose following GSTR-2's suspension from September 2017.

Recent Legislative Amendments

Budget 2025 Updates

February 1, 2025

  1. Changes to Section 34 of the CGST Act, 2017: The proviso to sub-section (2) has been modified to explicitly mandate the reversal of corresponding ITC when a credit note is issued. This means if a supplier reduces their tax liability through a credit note, the recipient must also reverse any ITC previously claimed on that transaction.
  2. Changes to Section 38 of the CGST Act, 2017: Section 38(1) now omits the phrase "auto-generated," indicating that the ITC statement (GSTR-2B) may no longer be entirely system-driven. Businesses might need to verify and reconcile invoices and ITC using an Invoice Management System (IMS) instead of solely relying on system-generated data. Furthermore, a new clause (c) in Section 38(2) empowers the government to specify additional details for the ITC statement via rules.

Input Tax Credit Reversal in GSTR-3B

Table 4(B) of the GSTR-3B form is designated for all types of ITC reversals.

  1. Reversal under CGST Rules 42 and 43: Input credit for goods and services used partially for business and partially for other purposes must be reversed. This also applies when supplies involve a mix of taxable, exempt, and nil-rated items. Any ITC on capital goods used for taxable, exempt, or nil-rated supplies must be apportioned, and the portion not used for business must be reversed.
  2. Other Reversals: This category includes any other ITC that needs to be reversed in the taxpayer's accounting records.

The GSTR-2B statement indicates whether a specific ITC is eligible for claims. If an ineligible ITC has been incorrectly availed, the taxpayer must reverse it in GSTR-3B.

Input Tax Credit Reversal in GSTR-2 (Historical Context)

Table 11 of GSTR-2 previously addressed the reversal of input tax credit, covering several scenarios:

ITC on Inward Supplies

This corresponds to 11.A.(a) – Amount in terms of rule 37(2) in GSTR-2. If a dealer claimed ITC on inward supplies but failed to pay the invoice amount to the supplier within 180 days, the ITC must be reversed. If only a portion of the invoice was paid, the ITC reversal occurs on a proportionate basis. The reversed ITC amount is then added to the output liability. This amount must be further categorized into IGST, CGST, SGST, and Cess, and recorded in the respective columns.

For example: Mr. A received goods on July 1, 2017, valued at Rs.10,000, with GST of Rs.1,800 charged. Mr. A claimed the Rs.1,800 GST as ITC in his GSTR-2. If Mr. A failed to pay the invoice by December 2017, he would need to reverse the Rs.1,800 ITC when filing GSTR-2 for December 2017 in January 2018.

Credit Note Issued to ISD

This relates to 11.A.(b) – Amount in terms of rule 39(1)(j)(ii). When an Input Service Distributor (ISD) receives a credit note from a supplier, any ITC previously distributed must be reversed. The dealers who received this credit also need to reverse the corresponding ITC, maintaining the same proportion as the original distribution by the ISD. This reversed ITC is added to the output liability and segregated into IGST, CGST, SGST, and Cess in the designated columns.

For example: M/s X received services worth Rs.1,00,000, incurring GST of Rs.18,000. This credit was distributed to dealers A and B in a 1:2 ratio. Both A and B claimed this ITC in their GSTR-2. If M/s X later received a credit note for Rs.23,600 (including Rs.3,600 GST), A and B would need to reverse this Rs.3,600 GST in the 1:2 ratio. Thus, A reverses Rs.1,200 (3600 * 1 / 3), and B reverses Rs.2,400 (3,600 * 2 / 3), documenting this in their GSTR-2's ITC reversal section.

ITC on Input Supplies Used Partly for Business, Exempt Supplies, or Personal Use

This refers to 11.A.(c) – Amount in terms of rule 42(1)(m). ITC attributed to exempt supplies and personal use must be reversed in GSTR-2.

Calculating ITC Reversal on Exempt Supplies:

Step 1 – Determine Common Credit

Common Credit is calculated as: Total ITC on Input Supplies Less: ITC on supplies used for Personal purposes Less: ITC on supplies used for providing exempt supplies Less: ITC on which credit is not available Less: ITC on supplies other than exempted but including zero-rated supplies (ITC on normal supplies)

Simply put, common credit represents ITC on inputs partially utilized for exempt supplies or personal use.

Step 2 – Calculate Reversal for Exempt Supplies

Amount of ITC reversal attributable to inputs partly used for Exempt supplies = (Value of Exempt Supplies * Common Credit) / Total Turnover in the State.

Calculating ITC on Personal Use:

5% of the Common Credit is attributed to personal use.

Both calculated ITC amounts must be reversed in the dealer's GSTR-2 and added to their output liability, with proper segregation into IGST, CGST, SGST, and Cess in the relevant columns.

ITC on Capital Goods Used Partly for Business, Exempt Supplies, or Personal Use

This pertains to 11.A.(d) – Amount in terms of rule 43(1)(h). ITC on capital goods employed for exempt supplies and non-business purposes also requires reversal. The calculation process mirrors that for ITC on inputs used for exempt supplies and personal use.

Step 1 – Determine Common Credit

Common Credit is calculated as: ITC on Capital Goods Less: ITC on capital goods put to personal use Less: ITC on capital goods used for exempted goods Less: ITC on capital goods used in supplies other than exempted but including zero-rated supplies (ITC on normal supplies)

Step 2 – Calculate Reversal for Exempt Supplies and Personal Use

Amount of ITC reversal attributable to capital goods partly used for Exempt supplies and Personal use = (Value of Exempt Supplies * Common Credit) / Total Turnover in the State.

Step 3 – Monthly Reversal

This ITC reversal must be performed monthly. Assuming an asset life of 5 years, the monthly ITC reversal amount is calculated as: Amount from Step 2 / 60 (months). The reversed ITC must be added to output liability, recorded in column 2, and disaggregated into IGST, CGST, SGST, and Cess in their respective columns.

When Reversal on Inputs for Exempt/Non-Business Purpose Exceeds Annual Reversal

This corresponds to 11.A.(e) – Amount in terms of rule 42(2)(a). If, after filing GSTR-9 (Annual Return), the total ITC on inputs used for non-business or exempt supplies is found to be greater than the total ITC reversed during the year in GSTR-2, the differential amount must be reversed in GSTR-2. This difference is added to the output tax liability and segregated into IGST, CGST, SGST, and Cess.

When Annual Reversal Exceeds Reversal on Inputs for Exempt/Non-Business Purpose

This relates to 11.A.(f) – Amount in terms of rule 42(2)(b). This scenario is the inverse of the previous point, where only one of these two conditions will apply. In this case, the differential amount can be re-claimed as ITC, which should be reduced from the output liability. This reclaimable ITC must be segregated into IGST, CGST, SGST, and Cess.

Payment of ITC Reversal Added to Output Tax Liability

This section covers 11.(A).(g) – On account of the amount paid subsequent to reversal of ITC. All ITC reversals that increase output tax liability are subject to payment. Any such payment made must be recorded here and categorized as IGST, CGST, SGST, and Cess.

Amendments to Previous ITC Reversal Information

This corresponds to 11.(B) – Amendment of information furnished in Table No 11 at S. No.A in earlier return. As GSTR-2 cannot be revised, any amendments to previously reported reversals must be declared in this section.

Further Reading

Frequently Asked Questions

What situations require input tax credit (ITC) reversal under GST?
ITC reversal is required if payment to the supplier is not made within 180 days, or if inputs and capital goods are used for personal consumption or for providing exempt supplies, among other specific conditions outlined in GST rules.
How does the 180-day payment rule affect ITC claims and reversals?
If a taxpayer claims ITC on inward supplies but fails to pay the supplier within 180 days from the invoice date, the ITC previously claimed must be reversed, and the amount added back to the output tax liability.
Can ITC be reversed for supplies used for both business and personal purposes?
Yes, ITC related to input supplies or capital goods that are partly used for business and partly for personal or non-business purposes, including exempt supplies, must be reversed proportionally as per CGST Rules 42 and 43.
What is the significance of GSTR-2B in identifying ITC for reversal?
GSTR-2B provides details on eligible and ineligible ITC. If an ITC reflecting in GSTR-2B is found to be ineligible but has been availed by the taxpayer, it must be reversed in GSTR-3B.
How are credit notes handled in relation to ITC reversal for Input Service Distributors (ISDs)?
When an ISD receives a credit note from a supplier, any ITC previously distributed to recipient dealers must be reversed by both the ISD and the recipient dealers in the same proportion as the initial distribution.