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A controller reviewing the FY 2025-26 GSTR-3B filings for a manufacturing corporate with a treasury desk realises that the finance team has claimed 100 per cent of the ITC on the shared corporate services — the CFO's office rent, the leased server room, the enterprise software subscription — against the taxable manufacturing output, with no D1 or D2 reversal against Table 4(B) for any of the twelve months. Treasury interest income for the year was Rs 5.4 crore. Manufacturing turnover was Rs 28.8 crore. The common ITC pool on the shared services was roughly Rs 1 crore. Under Rule 42, the exempt-to-total ratio is 5.4 / (5.4 + 28.8) = 15.79 per cent. The full-year D1 that should have been reversed is Rs 15.79 lakh; the D2 deemed non-business component is Rs 5 lakh; the total under-reversal at the September 2026 annual reconciliation is Rs 20.79 lakh plus Section 50 interest at 18 per cent per annum from each of the twelve monthly GSTR-3B due dates. The exposure is not the Rs 20.79 lakh; it is whether the sustained non-computation reads as a Section 73 bona fide correction (Rs 2 lakh penalty ceiling at 10 per cent) or a Section 74 suppression allegation (Rs 20.79 lakh penalty ceiling at 100 per cent). The classification is what the reconciliation control on the finance function's side is expected to hold.
Rule 42 of the CGST Rules apportions common input tax credit on inputs and input services between taxable and exempt supplies. Total ITC T is reduced by T1 (ITC exclusively for non-business), T2 (ITC exclusively for exempt supplies), and T3 (ITC blocked under Section 17(5)) to arrive at C1 credited to the electronic credit ledger. T4 (ITC exclusively for taxable supplies including zero-rated) is separated. The remainder C2 is the common credit. D1 equals (E over F) times C2, where E is the aggregate exempt turnover for the tax period and F is the total turnover. D2 equals five per cent of C2 as the deemed non-business apportionment. C3 equals C2 minus D1 minus D2 and is the eligible common credit. D1 and D2 are added to output tax liability for the tax period. Rule 43 applies the same logic to capital goods with a sixty-month useful-life spread — Tm equals Tc over sixty, Te equals Tm times (E over F), reversed monthly for the sixty months. Both rules require an annual reconciliation before September of the following financial year, with Section 50 interest at 18 per cent per annum on any short reversal. Section 17(4) offers banks, financial institutions, and NBFCs an optional flat fifty per cent claim in lieu of Rule 42 and Rule 43. The Explanation to Rule 43 deems the value of a security at one per cent of sale value — the deeming provision that pulls treasury-heavy corporates into the mixed-supply zone. Notification 12/2017-CTR is the primary source of the exempt-supplies list that most commonly triggers Rule 42 for a corporate that does not consider itself a mixed-supply entity.
A monthly working paper against every GSTR-3B that computes T, T1, T2, T3, C1, T4, C2, D1, D2, and C3 for the tax period on the inputs and input services side, and Tc, Tm, and Te for the capital goods side. A common-ITC pool schedule listing every invoice classified as common (shared corporate services, IT infrastructure, professional fees, rent on shared premises) with a book-side tag. A separate schedule listing every exempt-turnover source with a Notification 12/2017-CTR entry reference — interest income (entry 27), sale-of-securities gains at one per cent of sale value per Explanation to Rule 43, exempt healthcare or educational revenue, exempt agricultural produce handling. An annual reconciliation checklist that runs on the closing GSTR-3B for the financial year — recompute D1 and Te using the aggregate exempt-to-total ratio for the full twelve months, compare against the sum of the twelve monthly reversals, and add the differential to Table 4(B) with Section 50 interest before the September following-FY deadline. A Section 17(4) election tracker for financial services subsidiaries — the fifty per cent flat option, once elected in a financial year, cannot be withdrawn for the balance of the FY.
Every GSTR-3B for a mixed-supply entity carries a Table 4(B) reversal populated from the monthly Rule 42 D1 plus D2 computation and the monthly Rule 43 Te computation, with the underlying working paper attached to the reconciliation file for the tax period. The September following-FY annual reconciliation lands with a documented true-up entry against the closing GSTR-3B, computed on the aggregate exempt-to-total ratio for the twelve months, with Section 50 interest on any short reversal from each of the monthly due dates. The common-ITC pool is a first-class continuously-refreshed schedule rather than a spreadsheet the tax executive reconstructs at year-end. The reconciliation control on the finance function's side is what holds the case at the Section 73 bona fide correction ceiling of ten per cent penalty, rather than allowing the sustained non-computation to escalate into a Section 74 suppression allegation at the one hundred per cent penalty ceiling — the operational answer to the tenfold penalty gap that the classification alone drives.
You are working through the ITC schedule for the closing GSTR-3B of FY 2025-26. The manufacturing division ran a taxable output of Rs 28.8 crore for the year. The treasury desk turned over Rs 5.4 crore in interest income from fixed deposits and corporate deposits. The controller pulls the twelve monthly GSTR-3B filings and sees no D1, no D2, no Te reversal in Table 4(B) for any month of the year. The shared services ITC — CFO’s office rent, leased server room, enterprise software subscription — was claimed at 100 per cent against the taxable manufacturing output.
The question is not whether Rule 42 and Rule 43 apply. Once treasury interest income sits in the P&L, they do. The question is what the shortfall looks like at the September 2026 annual reconciliation, and whether the department reads a full year of non-computation as a bona fide oversight or as suppression of facts.
The quick answer
Rule 42 of the CGST Rules apportions common input tax credit on inputs and input services between taxable and exempt supplies each tax period. The mechanic is a formula: D1 = (E / F) × C2, where E is aggregate exempt turnover, F is aggregate total turnover, and C2 is the common credit after removing ITC that is exclusively taxable or exclusively exempt or blocked. D1 gets added to output tax in the same GSTR-3B. A separate D2 equal to 5 per cent of C2 is added as the deemed non-business apportionment.
Rule 43 applies the same logic to capital goods with a sixty-month useful-life spread. The common ITC on the capital good is Tc; monthly attribution Tm equals Tc divided by 60; and Te equals Tm times (E / F), reversed each month for sixty months.
Both rules require an annual reconciliation under Rule 42(2) and Rule 43(2) before September of the following financial year — recompute using the full-year exempt-to-total ratio, compare against the sum of monthly reversals, and true up with Section 50 interest at 18 per cent per annum on any shortfall.
What triggers the rules — the statute anchor
Section 17(2) of the CGST Act 2017 is the statutory basis. Where goods or services are used partly for taxable supplies and partly for exempt supplies, ITC is restricted to the taxable-attributable portion. Section 17(3) extends the definition of exempt supply to include reverse-charge supplies (from the recipient’s angle), transactions in securities, sale of land, and — subject to Schedule II paragraph 5(b) — sale of building.
The CGST Act does not do the apportionment arithmetic itself. Rule 42 and Rule 43 do — Rule 42 for inputs and input services (consumed in the tax period), Rule 43 for capital goods (spread over sixty months). The two rules run in parallel every month; they are not alternatives.
Rule 42 — the inputs and input services formula
The Rule 42 computation for a given tax period walks through six symbols:
- T = total ITC on inputs and input services for the tax period (from the purchase register).
- T1 = ITC exclusively for non-business purposes — excluded from the electronic credit ledger.
- T2 = ITC exclusively for exempt supplies — excluded from the electronic credit ledger.
- T3 = ITC blocked under Section 17(5) — food and beverages, health services, motor vehicles under 13 seats, gifts, and free samples.
- C1 = T − (T1 + T2 + T3), credited to the electronic credit ledger for the tax period.
- T4 = ITC exclusively for effecting taxable supplies including zero-rated and deemed exports — fully claimable.
- C2 = C1 − T4, the common credit that Rule 42 apportions.
Then the apportionment:
- D1 = (E / F) × C2, where E = aggregate exempt turnover for the tax period, F = total turnover for the tax period. D1 is added to output tax liability.
- D2 = 5 per cent of C2, deemed for non-business apportionment. D2 is added to output tax liability.
- C3 = C2 − (D1 + D2), the eligible common credit.
Illustrative arithmetic. A month in FY 2025-26 with common ITC C2 of Rs 8.4 lakh, aggregate exempt turnover E of Rs 45 lakh (treasury interest income for the month), and aggregate total turnover F of Rs 240 lakh (manufacturing plus treasury). D1 equals (45 / 240) × 8.4 = Rs 1.575 lakh. D2 equals 5 per cent × 8.4 = Rs 0.42 lakh. Combined reversal in Table 4(B) of that month’s GSTR-3B is Rs 1.995 lakh. C3 — the eligible common credit — is Rs 8.4 − 1.575 − 0.42 = Rs 6.405 lakh.
Rule 43 — the sixty-month capital-goods spread
Rule 43 applies the same D1-style apportionment to capital goods, with two modifications. The useful life of every capital good is deemed to be sixty months under Rule 43(1)(c). And the full common-credit ITC on the capital good — Tc — is spread across those sixty months rather than reversed in the tax period the invoice was booked.
- Tm = Tc / 60, the monthly attribution.
- Te = Tm × (E / F), the amount attributable to exempt supplies for the tax period, added to output tax.
Illustrative arithmetic. A leased server room capitalised in April 2026 with common ITC Tc of Rs 60 lakh. Tm equals Rs 1 lakh per month. In a month where the exempt-to-total turnover ratio (E / F) is 20 per cent, Te equals Rs 20,000 — reversed against Table 4(B) for that month. The reversal continues for sixty months. If the ratio changes month to month, so does Te — the September 2026 Te might be Rs 15,000 and the October 2026 Te might be Rs 25,000, and both are reversed against the respective GSTR-3B.
The two rules together mean the Table 4(B) reversal in any tax period is the sum of the Rule 42 D1 + D2 for inputs and input services plus the Rule 43 Te for every capital good still inside its sixty-month window.
Trigger 1 — treasury interest income and securities
The single most common trigger for a corporate that does not think of itself as a mixed-supply entity is treasury income. Entry 27 of Notification 12/2017-Central Tax (Rate) exempts “services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.” Every rupee of interest income the corporate treasury earns on a fixed deposit, a corporate deposit, or an intercompany advance is exempt turnover for the E-over-F ratio.
Sale of investments is the second treasury trigger. The Explanation (a) to Rule 43 deems the value of a security at 1 per cent of the sale value — a Rs 50 crore sale of an equity holding contributes Rs 50 lakh to the exempt-turnover figure E, not the full Rs 50 crore. But the deeming still pulls the transaction into the mixed-supply zone.
A manufacturing corporate with a Rs 200 crore annual taxable revenue and a Rs 30 crore treasury interest income earns an exempt-to-total ratio of 30 / 230 = 13.04 per cent for the year. That ratio has to be applied to the entire common ITC pool — every shared service, every corporate infrastructure invoice, every capital good used across both the manufacturing and the treasury function.
Trigger 2 — exempt supplies under Notification 12/2017-CTR
Any output the corporate books that falls inside the Notification 12/2017-Central Tax (Rate) exempt-services list is exempt turnover. The exempt list includes healthcare services by a clinical establishment (entry 74), services by an educational institution to its students and staff (entry 66), transportation of passengers by non-air-conditioned contract carriage (entry 15), transportation of goods by road other than by a goods transportation agency (entry 18), and agricultural produce handling and storage (entries 54–57).
A corporate hospital’s outpatient consultation revenue is exempt turnover under entry 74. A corporate university’s tuition fee revenue is exempt under entry 66. A logistics subsidiary that operates its own trucks (not a goods transportation agency) earning exempt freight income under entry 18 is a mixed-supply entity even if its parent trades in taxable goods.
The reconciliation working paper needs a Notification 12/2017-CTR entry reference against every exempt-revenue line so the annual audit — and the September following-FY reconciliation — can trace each rupee of E back to a specific exempt-supply classification.
Trigger 3 — inter-branch supply and the Section 17(4) flat option
A banking company, a financial institution, or a non-banking financial company engaged in accepting deposits or extending loans or advances has the option under Section 17(4) to elect a flat 50 per cent claim on eligible ITC on inputs, capital goods, and input services each month, with the remaining 50 per cent lapsing. The option is filed at the beginning of the financial year and cannot be withdrawn for the balance of the FY.
The 50 per cent flat is the economically sensible choice for most banks and NBFCs whose actual exempt-to-total ratio would be materially higher than 50 per cent under Rule 42 (because interest income dominates their P&L). For a lending institution whose exempt turnover is 65 per cent of total turnover, the Rule 42 monthly computation would reverse 65 per cent of common ITC; the 50 per cent flat reverses only 50 per cent. The trade-off is administrative — the 50 per cent flat requires no monthly working paper and no annual reconciliation, but forfeits the residual claim on the exempt-attributable portion.
The election is not available to a non-financial corporate whose treasury generates exempt interest income. A manufacturing corporate with treasury income runs Rule 42 monthly and reconciles annually — the 50 per cent flat is not on the table.
Trigger 4 — partly business, partly non-business
Section 17(1) restricts ITC to the extent goods or services are used for the purposes of business. Where an input service — a mobile phone plan for the CFO, a leased flat used partly as corporate guest house and partly for the promoter’s family, a company car used for both business travel and personal use — carries mixed business and non-business use, Rule 42 apportions the credit.
The D2 = 5 per cent × C2 deemed non-business apportionment inside the Rule 42 formula is what most corporates rely on for the general non-business bleed. A specifically identified non-business input service — a director’s personal-use car maintained on the company’s books — is T1 (excluded from C1 entirely) rather than a Rule 42 apportionment. The classification between T1 and D2 matters for the audit trail: T1 items should have a specific book-side non-business flag; D2 is the residual apportionment on inputs the corporate cannot cleanly divide.
The September following-FY annual reconciliation — where the exposure crystallises
Rule 42(2) and Rule 43(2) require an annual reconciliation of the monthly reversals against a full-year computation. The full-year D1 (and Te for capital goods) is computed using the aggregate exempt-to-total turnover ratio for the twelve months, not the monthly ratios. The sum of the twelve monthly D1s (and Tes) is compared against the full-year figure. The differential is either added to output tax with Section 50 interest at 18 per cent per annum (if the monthly reversals were understated) or claimed as ITC (if they were overstated).
The reconciliation must be filed in a GSTR-3B before September of the following financial year. For FY 2025-26, the annual true-up lands in the September 2026 GSTR-3B — the same window as the Rule 37A supplier-default reversal deadline and the Rule 36(4) at-risk-queue closure. The three deadlines compound the September following-FY workload for a mid-market indirect tax function.
The exposure is not the shortfall itself. On the illustrative Rs 20.79 lakh under-reversal, the tax with interest closes at roughly Rs 22.5 lakh at the September 2026 payment date. The exposure is whether the department reads twelve months of zero Rule 42 entries in Table 4(B) as a bona fide oversight (Section 73 at 10 per cent penalty ceiling — Rs 2 lakh) or as suppression of facts (Section 74 at 100 per cent — Rs 20.79 lakh, before any parallel Section 122 exposure).
The reconciliation control on the finance function’s side — the monthly working paper that computes D1 and Te against every GSTR-3B — is what holds the case at the Section 73 ceiling. The absence of the working paper is what escalates the classification.
The subsidy angle — Ind AS 20 cross-reference
Where the exempt income line in the P&L is a government subsidy under an exempt-supply notification, the accounting treatment under Ind AS 20 also matters. Subsidy income classified as “revenue-related” and credited to a separate P&L line surfaces in the aggregate exempt turnover E for the Rule 42 ratio. Subsidy classified as “asset-related” and deducted from the carrying amount of the underlying asset does not surface as turnover — but the input tax credit on the underlying asset itself becomes a Rule 43 capital-goods case if the asset is used across both the taxable output line and the exempt subsidised line.
The Ind AS 20 classification decision (revenue-related deferred income versus asset-related netting) therefore drives the E-figure that enters the Rule 42 ratio. The controller-level review of the annual reconciliation should trace every subsidy line through the Ind AS 20 classification and the Notification 12/2017-CTR entry reference before signing off the September GSTR-3B true-up.
When the manual Rule 42 monthly working paper outgrows itself
For a small mixed-supply entity with a single exempt-revenue source (treasury interest income) and under 100 common-ITC invoice lines per month, the Rule 42 working paper fits in an Excel schedule that the tax executive refreshes on Day 12 of the monthly close alongside the GSTR-2B ITC runbook. One analyst can hold the monthly D1, D2, and Te computation, and the annual reconciliation in September closes with a single controller review.
Above 500 common-ITC invoice lines per month, or above three concurrent exempt-revenue streams (treasury interest + healthcare exempt revenue + subsidy income under a Notification 12/2017-CTR entry), the manual working paper starts to leak — a common-ITC invoice miscoded as fully taxable, a capital good outside its sixty-month spread, an exempt-revenue line missing its Notification 12/2017-CTR entry reference. Each miss compounds the September following-FY reconciliation and the Section 74 exposure sits open until the working paper is rebuilt from the ledger.
At that scale, moving the common-ITC classification and the Rule 42 monthly reversal onto continuously refreshed detection — where Terra Insight’s GST reconciliation software treats the D1, D2, and Te as first-class monthly outputs and the September annual reconciliation as a scheduled control — is what keeps the tenfold penalty gap between Section 73 and Section 74 closed by design rather than by year-end firefighting. Below that scale, the three-way ITC workbook is the right manual template for the monthly discipline that builds the reconciler’s judgement for when scale demands the shift.
Go deeper
- Rule 37 and Rule 37A ITC reversal on supplier default — the reciprocal ITC-reversal machinery on the supplier-side default
- GSTR-2B ITC runbook — Days 11 to 15 of the monthly close — where the Rule 42 monthly working paper slots into the close calendar
- GSTR-2B ITC reconciliation failure modes — the failure taxonomy that surfaces Rule 42 non-computation as a Section 74 escalation trigger
- Blocked ITC under Section 17(5) — the T3 exclusion inside the Rule 42 formula
- Three-way ITC workbook — free manual template
- GST reconciliation software for India
Frequently Asked Questions
Which line in the P&L should tell me I need to run Rule 42?
The three most common P&L lines that surface a Rule 42 trigger event are interest income (from bank deposits, corporate deposits, or intercompany advances — entry 27 of Notification 12/2017-Central Tax (Rate) exempts services by way of extending deposits, loans, or advances in so far as the consideration is represented by way of interest or discount), sale-of-investments gains (Explanation (a) to Rule 43 deems the value of a security at one per cent of the sale value, which pulls treasury operations into the aggregate exempt turnover), and any income line that maps to Notification 12/2017-CTR — subsidy income under an exempt scheme, exempt healthcare or educational output, agricultural produce handling, or non-air-conditioned passenger transport revenue. A corporate whose primary business is fully taxable but whose treasury turns over Rs 40 lakh a quarter in fixed deposit interest income is a Rule 42 case, and the finance manager who has never applied the rule is running a monthly under-reversal that will surface at the September following-FY annual reconciliation with Section 50 interest attached.
Do I have to run Rule 42 monthly or only at year-end?
Both. Rule 42(1) requires the D1 and D2 computation every tax period — every month for a monthly filer, every quarter for a QRMP filer. The monthly D1 uses the exempt-to-total turnover ratio for that specific month, added to output tax in the GSTR-3B for the same month. Rule 42(2) then requires an annual reconciliation at the end of the financial year — the full-year D1 is computed using the aggregate exempt-to-total turnover ratio for the twelve months, compared against the sum of the twelve monthly D1s already reversed, and the differential is either added to output tax with Section 50 interest at 18 per cent per annum (if the monthly reversals were understated) or claimed back as ITC (if they were overstated). The annual true-up must be filed before the September of the following financial year — for FY 2025-26, the annual reconciliation lands in the September 2026 GSTR-3B. Missing the monthly computation entirely and hoping the annual true-up catches everything is the fact pattern the department reads as suppression of facts.
How is Rule 43 different from Rule 42?
Rule 42 covers inputs and input services — the everyday consumables, professional fees, rent, and utilities that get consumed in the tax period they are booked. The apportionment happens in that tax period and does not carry forward. Rule 43 covers capital goods — plant, machinery, IT equipment, furniture, and fixtures with a useful life longer than one year. The full common-credit ITC on the capital good is spread over sixty months (five years, taken as the deemed useful life under the rule), and the Te reversal — the exempt-supplies attributable amount — is computed monthly on the one-sixtieth attribution for each of the sixty months. A Rs 60 lakh common ITC on a shared server room delivers a Tm of Rs 1 lakh a month, and if the exempt-to-total turnover ratio for that month is 20 per cent, the Te reversal is Rs 20,000 a month for the next sixty months. The same annual reconciliation applies under Rule 43(2), with the same September following-FY deadline and the same Section 50 interest on the differential.
I under-computed the monthly Rule 42 reversal all year. What happens at the September following-FY reconciliation?
The annual reconciliation under Rule 42(2) computes the full-year D1 using the aggregate exempt-to-total turnover ratio for the twelve months. Compare that against the sum of the twelve monthly D1s already reversed. The differential — where the monthly reversals were understated — is added to output tax in a GSTR-3B filed before September of the following financial year, with Section 50 interest at 18 per cent per annum from the original monthly GSTR-3B due date to the true-up payment date. A Rs 5 lakh under-reversal spread across an FY 2025-26 twelve-month calendar carries roughly Rs 90,000 in Section 50 interest by the September 2026 true-up date if all twelve months carried the same under-reversal. Where the department reads the sustained non-computation as deliberate — no monthly Rule 42 working paper filed with the return, no D1 or D2 entry against Table 4(B) of any GSTR-3B for the year — the exposure escalates from a Section 73 correction into a Section 74 suppression allegation with the 100 per cent penalty ceiling. The reconciliation is not optional and the finance function’s exposure is the difference between running the monthly computation and hoping the September true-up catches everything.
Can banks and NBFCs skip Rule 42 by using the 50 per cent option?
A banking company, a financial institution, and a non-banking financial company engaged in supplying services by way of accepting deposits or extending loans or advances have the option under Section 17(4) to elect a flat fifty per cent claim on eligible ITC on inputs, capital goods, and input services each month, with the remaining fifty per cent lapsing. The option, once exercised in a financial year, cannot be withdrawn for the balance of that FY. The election is filed at the beginning of the FY and it replaces the Rule 42 and Rule 43 monthly computation and annual reconciliation for that entity. The trade-off is arithmetic — a bank whose actual exempt-to-total ratio is materially below fifty per cent gives up more ITC under the flat option than under Rule 42; a bank whose actual ratio hovers above fifty per cent gives up less. Most lending institutions elect the fifty per cent flat because the administrative cost of running the Rule 42 monthly computation across a large common ITC pool exceeds the marginal recovery. The election is not available to a non-financial corporate whose treasury generates exempt interest income — that corporate has to run Rule 42.
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
- ▸ Section 17(2) and 17(3), Central Goods and Services Tax Act 2017 — Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies. The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land, and subject to clause (b) of paragraph 5 of Schedule II, sale of building. This is the statutory basis for Rule 42 and Rule 43 — the CGST Act does not restrict ITC in absolute terms on mixed supplies, it apportions the credit between the taxable and exempt legs, and the apportionment mechanic is what the two Rules describe.
- ▸ Rule 42, Central Goods and Services Tax Rules 2017 — The input tax credit in respect of inputs or input services, which attract the provisions of sub-section (1) or sub-section (2) of Section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner. Total input tax T is reduced by T1 (exclusively non-business), T2 (exclusively exempt), and T3 (blocked under Section 17(5)) to arrive at C1 credited to the electronic credit ledger; T4 (exclusively taxable) is separated; the remainder C2 is the common credit. D1, being the amount attributable to exempt supplies, equals (E divided by F) multiplied by C2, where E is the aggregate value of exempt supplies during the tax period and F is the total turnover during the tax period. D2, deemed for non-business purposes, equals five per cent of C2. C3, the eligible common credit, equals C2 minus D1 minus D2. D1 and D2 are added to output tax liability for the tax period. The rule requires monthly computation and an annual reconciliation before September of the following financial year.
- ▸ Rule 43, Central Goods and Services Tax Rules 2017 — The input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of Section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner. The useful life of every capital good is taken as five years or sixty months. Common capital goods credit Tc is spread as Tm equals Tc divided by sixty for each month during the useful life. Te, the amount attributable to exempt supplies for each tax period, equals Tm multiplied by (E divided by F), where E and F carry the same meaning as under Rule 42. The Explanation to Rule 43 clarifies that the value of a security shall be taken as one per cent of the sale value of such security — the deeming provision that makes treasury-heavy corporates and holding companies Rule 43 applicable even when the ratio of exempt-to-total turnover looks small on the P&L.
- ▸ Section 17(4), Central Goods and Services Tax Act 2017 — A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse. The option once exercised shall not be withdrawn during the remaining part of the financial year. This is the fifty-per-cent flat alternative that many banks, NBFCs, and lending platforms elect at the beginning of every financial year rather than run the Rule 42 monthly computation and the Rule 43 sixty-month spread on their entire common ITC pool.
- ▸ Notification 12/2017-Central Tax (Rate), dated 28 June 2017 — The Central Government exempts intra-State supply of services of description as specified in the corresponding entry in column 3 of the Table below, from so much of the central tax leviable thereon under sub-section (1) of Section 9 of the said Act, as is in excess of the said tax calculated at the rate as specified in the corresponding entry in column 4 of the said Table. The Table enumerates the exempt-services list — services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (entry 27); services by way of transportation of passengers by non-air-conditioned contract carriage other than radio taxi (entry 15); healthcare services by a clinical establishment, an authorised medical practitioner or para-medics (entry 74); services provided by an educational institution to its students, faculty and staff (entry 66); and services by way of transportation of goods by road other than by a goods transportation agency (entry 18). The exempt-services list is the primary source of Rule 42 and Rule 43 trigger events for a corporate that does not think of itself as a mixed-supply entity.