ITC Apportionment for Taxable vs Exempt Supplies (GST Guide)

If you’ve ever handled GST for a business that deals in both taxable and exempt supplies, you already know how confusing the ITC part gets. It’s literally the moment where every accountant quietly asks their senior, “Sir, yeh 42-43 kaise hota hai?”

Don’t worry. This blog breaks everything into super-simple human language.

Because Section 17 + Rules 42–43 can feel heavy if read straight from the Act—but honestly, when you understand the logic behind it, the whole thing becomes much simpler.

1. Why Do We Need Apportionment of ITC?

Let’s say you run a business where:

• some of your products/services are taxable,
• some are exempt,
• and some inputs are used commonly for both.

Now think about this:

👉 If you use the same inputs for both taxable and exempt work… Can you claim full ITC?

No.

GST says: “You can take ITC only to the extent it relates to taxable supplies.”

So ITC has to be split (apportioned) between:

• Allowed ITC → for taxable supplies
• Not allowed ITC → for exempt supplies

This is the whole point of Section 17(2) & Rules 42–43.

2. What Section 17 Says (In Simple Language)

Section 17(1): If you use goods/services partly for business and partly for personal use → claim only business ITC.

Section 17(2): If you use inputs for both taxable and exempt supplies → claim only the proportion relating to taxable supplies.

Section 17(3): Certain things are treated as exempt for apportionment, like:

• sale of land
• sale of completed building
• securities transactions
• interest income (for banks, NBFCs etc.)

Section 17(5): Blocked ITC (we covered in previous blogs).

So Section 17 gives the principles, and Rules 42–43 give the method to calculate allowed/disallowed ITC.

3. Types of Inputs (Very Important Before Calculation)

Your PDF structure suggests splitting ITC into three buckets:

1️⃣ ITC Exclusively for Taxable Supplies (T1)

Example: GST paid on goods used only for taxable sales – this ITC is fully allowed.

2️⃣ ITC Exclusively for Exempt Supplies (T2)

Example: GST on inputs used only for exempt product – this ITC is fully disallowed.

3️⃣ Common ITC (C1)

This is the tricky part. These are inputs used for both taxable + exempt activities.

This “common pool” ITC must be apportioned using Rule 42 (inputs/services) and Rule 43 (capital goods).

4. Rule 42 – Apportionment for Inputs & Input Services

Rule 42 gives the formula to split common credits.

Let’s break it down the way GST authorities explain it, but in conversational tone.

First, from total ITC, remove:

• T1 → exclusively taxable
• T2 → exclusively exempt
• T3 → non-business use
• T4 → blocked ITC under Section 17(5)

What is left is called C1 (common ITC).

Now C1 has to be split:

C2 → Eligible common ITC (proportionate)

D1 → Portion attributable to exempt supplies (to reverse)

D2 → Portion for personal use (to reverse)

Only C2 can be claimed as eligible ITC.

5. Formula for Reversal Under Rule 42

D1 = (Exempt turnover ÷ Total turnover) × C1

This is the main reversal.

D2 = amount attributable to personal use

(most businesses keep this at zero unless specified)

Allowed ITC = C1 – (D1 + D2)

Don't worry — examples will make it clear.

6. Simple Example

Let’s say:

• Total ITC (input + services) = ₹1,00,000
• T1 (exclusively taxable) = ₹40,000
• T2 (exclusively exempt) = ₹20,000
• T3 = 0
• T4 (blocked) = 0

So C1 = ₹40,000 (this is common)

Now turnover:

• Taxable turnover = ₹80 lakh
• Exempt turnover = ₹20 lakh
• Total turnover = ₹1 crore

Step 1: Calculate D1

• D1 = (Exempt ÷ Total) × C1
• D1 = (20,00,000 ÷ 1,00,00,000) × 40,000
• D1 = 0.20 × 40,000
• D1 = ₹8,000 (to be reversed)

Step 2: D2

Assume personal use = 0

Step 3: Eligible Common ITC

• C2 = C1 – (D1 + D2)
• C2 = 40,000 – 8,000
• C2 = ₹32,000

Final Eligible ITC

• = T1 + C2
• = 40,000 + 32,000
• = ₹72,000

This is exactly how Rule 42 works.

7. Rule 43 – Capital Goods Apportionment (Simplest Explanation)

Capital goods are used over time, not immediately consumed. So GST says: → apportion credit over 60 months.

Key Concept:

Useful life = 60 months → every month, 1/60th credit is considered.

Formula per month:

Eligible ITC = (Total ITC ÷ 60 months)

If capital good is used:

• only for taxable supplies → full monthly ITC allowed
• only for exempt supplies → zero ITC allowed
• for both → proportionate reversal every month just like Rule 42

8. Example (Capital Goods Used for Both Taxable + Exempt)

• Capital good purchased:
• GST paid = ₹1,20,000

Monthly ITC = 1,20,000 ÷ 60 = ₹2,000/month

Assume:

• Exempt turnover = 30%
• Taxable = 70%

Then monthly reversal:

D1 = 30% of 2,000 = ₹600

Eligible monthly ITC = 2,000 – 600 = ₹1,400

This happens every month until the 60-month period is completed.

9. Section 17(3): Items Treated as Exempt for Apportionment

GST authority highlights that exempt turnover includes:

• Interest income (loans, deposits, credit cards etc.)
• Sale of land
• Sale of completed building
• Securities transactions (e.g., share trading)

Meaning: Even if these are not officially exempt, they are treated as exempt for Rule 42 calculations.

10. Special Situations (Explained Human-Style)

1️⃣ If business shifts from exempt → taxable

You can reclaim ITC for remaining useful life of capital goods.

2️⃣ If business shifts from taxable → exempt

You must reverse ITC for remaining useful life.

3️⃣ Quarterly turnover changes

Rule 42 requires annual adjustment too.

11. Annual Recalculation (Very Important!)

Throughout the year you reverse ITC based on monthly turnover.

But at year-end, actual turnover may differ.

So GST requires annual true-up adjustment:

• If you reversed less during the year → reverse the difference
• If you reversed more → reclaim the difference

This is done in September return following the end of FY.

12. Another Practical Example (More Realistic)

Let’s say:

Common ITC (C1) for FY = ₹4,80,000

During the year you reversed based on monthly estimates = ₹60,000

But at year-end:

• Exempt turnover = 25%
• Total turnover = 100%

Actual reversal should be: D1 = 25% of 4,80,000 = ₹1,20,000

You already reversed = ₹60,000

Difference = 1,20,000 – 60,000 = ₹60,000

You must reverse this additional ₹60,000 in September return.

If reversed extra earlier, you would re-avail instead.

13. What Counts as “Exempt Turnover”?

GST authority highlights:

• Supplies without GST
• Nil-rated goods
• Non-taxable supplies (petroleum products)
• Interest income
• Sale of land/building
• Securities transactions
• Any supply on which recipient pays GST under RCM?

👉 Not exempt. Seller still counts as taxable.

14. Common Mistakes People Make

• Counting non-GST income in taxable turnover
• Not including interest income in exempt turnover
• Taking full ITC on capital goods used partly for exempt business
• Not doing annual reversal
• Using GSTR-2A instead of 2B values
• Not maintaining separate accounts for exempt supplies

Avoid these and apportionment becomes very simple.

15. Summary in the Most Human Way Possible

If your business does both taxable and exempt supplies, GST expects you to be fair:

• Rule 42 handles inputs + services
• Rule 43 handles capital goods
• Section 17 defines the principles
• Annual adjustment fixes any mismatch

Once you get the logic, the entire process becomes a simple maths problem.

Also Read: ITC Reversal & Re-claiming Under GST (Rule 37 & Rule 37A)