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

If there’s one part of GST Input Tax Credit that creates the most drama for accountants, it’s the ITC reversal rules. Everyone understands how to take ITC, but things get messy when the law asks you to reverse it because of some mismatch, late supplier filing, or non-payment to the vendor.

This is exactly where Rule 37 and the newly introduced Rule 37A come into the picture. These rules basically tell you:

• when you must reverse ITC,
• how to reverse it,
• when you can take it back later (re-claiming), and
• what happens if your supplier doesn’t file GSTR-3B on time.

Let’s break down everything from the GST authority into simple language and examples, so you don’t have to deal with the stress of reading legal jargon.

1. Why Does ITC Need to Be Reversed At All?

ITC is allowed only when certain conditions (under Section 16(2)) are satisfied:

• you must have a valid invoice
• you should receive the goods
• supplier must pay GST
• you must file GSTR-3B
• you must pay your vendor within 180 days

If any of these conditions fail later… ITC has to be reversed.

Think of reversal as “temporarily taking back the ITC until you fix the issue”.

2. Rule 37 – ITC Reversal When Payment to Supplier Is Not Made Within 180 Days

This is the classic rule everyone knows (and fears).

Rule 37 says:

This applies only when consideration is payable.

2.1 Simple Explanation

Let’s say you bought goods from a supplier and took ITC within a month. But due to cash flow issues or quality disputes, you didn’t pay them for six months.

GST says:

• “If 180 days pass without payment → ITC is no longer valid.”
• Reverse the ITC + interest
• When you finally pay the supplier → you can re-avail the ITC

This is a temporary reversal rule.

2.2 Example (Explained Simply)

• Invoice Value = ₹1,00,000
• GST = ₹18,000
• Total = ₹1,18,000

You claimed ITC of ₹18,000 in April 2024. But you paid the vendor only in December 2024.

180 days expired in October.

So what happens?

• Reverse ITC ₹18,000 in October return
• Pay interest from April → October
• After you finally pay in December, you can take back the ITC in the December return

This back-and-forth movement of ITC is exactly what Rule 37 covers.

2.3 Interest Calculation

Interest applies at 18% per annum on the ITC amount reversed.

• Interest period =
• From the date you claimed ITC → till date of reversal.

3. Rule 37A – New Rule for Supplier Filing GSTR-1 But Not Filing GSTR-3B

This is a newer rule introduced to solve a very common problem:

Supplier uploads invoice → invoice appears in your GSTR-2B

But… Supplier does not file GSTR-3B or does not pay tax.

Under Section 16(2)(c), ITC is allowed only if supplier has paid GST to Govt.

So earlier, officers used to ask recipients to reverse all ITC if supplier didn’t file returns.

Now GST introduced Rule 37A to handle this properly.

4. What Rule 37A Says (Explained Simply)

Rule 37A says:

This is a major compliance rule.

4.1 Why did they introduce Rule 37A?

Because thousands of recipients were stuck in confusion:

• Supplier shows invoice in GSTR-1 (so it appears in 2B)
• Recipient claims ITC
• Supplier disappears or doesn’t file 3B
• Tax officers deny ITC years later

Rule 37A now formalises this:

• If supplier hasn’t paid tax by 30 September next year → you reverse ITC
• If supplier later files 3B and pays GST → you re-avail ITC

5. Example for Rule 37A

GST Authority includes wording referencing: “amount paid to Government on such supply shall be deemed to have been paid.”

Meaning: ITC is allowed only after supplier files 3B.

So let’s use a relatable example.

Example

• Supplier B issues invoice dated 15 March 2024 to A.
• Invoice appears in A’s GSTR-2B for March 2024.
• A claims ITC in March.

But…

Supplier does not file GSTR-3B for March, April, May… Time passes…

By 30 September 2024, supplier still hasn’t filed 3B.

Now Rule 37A applies:

• A must reverse ITC in his October 2024 return (filed by 30 November).
• No interest needed (as per Rule 37A mechanism).

Then suddenly…

Supplier files GSTR-3B in January 2025 and pays GST.

Now A can re-avail the same ITC in January 2025 GSTR-3B.

This is how Rule 37A sorts the mess.

6. Difference Between Rule 37 and Rule 37A

Here’s the simplest comparison:

This comparison clears most confusion.

7. When ITC Reversal Is Permanent

(Not specifically Rule 37/37A but connected to the ITC framework)

Logic implies that reversal becomes permanent in cases such as:

• Goods lost, stolen, destroyed
• Goods written off
• Credit notes issued
• Blocked credits under Section 17(5)
• Exempt supplies
• Personal consumption

These ITC reversals are not re-claiming cases. They are final.

But Rule 37 and 37A allow temporary reversals.

8. Special Situations Explained with Real-World Tone

Let’s go over some situations both rules cover indirectly.

8.1 Supplier Files GSTR-1 but not GSTR-3B for 8 months

This is very common.

• Invoice appears in your GSTR-2B
• You claim ITC
• Officer says: “Supplier hasn’t paid GST.”

Under Rule 37A:

• If supplier fails to file 3B up to 30 September of next FY
• You must reverse ITC in October return
• Re-avail once supplier pays

No interest.

8.2 Supplier Uploads Wrong GSTIN and You Don’t See Invoice in 2B

• You cannot take ITC at all.
• No reversal/re-claiming applies because ITC was never valid.

8.3 You Paid Vendor 50% but Balance Pending

For Rule 37:

• ITC reversal is proportional.
• If half the invoice unpaid, reverse half the ITC.

8.4 Advance Paid but Goods Received Later

• No reversal rule applies.
• ITC allowed only after receiving goods.

9. Rule 37A Has No Interest — Why?

Government hints at the logic behind this:

• ITC was allowed because invoice was in GSTR-2B
• But GST was not paid by supplier
• Reversal is just a compliance adjustment
• It’s not the buyer’s fault

So charging interest would be unfair.

This is why Rule 37A does NOT require interest, unlike Rule 37.

10. What Happens If You Don’t Reverse ITC Under Rule 37/37A?

Authorities may issue:

• ITC mismatch notices
• Demand order
• Reversal with interest (in Rule 37 cases)
• Penalty for non-compliance

This is why ITC reconciliation is crucial.

11. How to Re-Avail ITC (Both Rules)

Both rules allow re-claiming without time limit (beyond Section 16(4)) because the reversal was not due to time-limit defect, it was due to condition failure.

✔ Rule 37 Re-claiming:

When payment made to supplier → re-avail in any later GSTR-3B.

✔ Rule 37A Re-claiming:

When supplier files GSTR-3B → re-avail in that month.

12. Summary in the Most Human Way

Here's Rule 37 in one line:

And Rule 37A in one line:

That’s it. These two rules basically handle situations where ITC becomes temporarily invalid.

Final Thoughts

ITC reversal is not actually a punishment. It’s the law’s way of saying:

Rule 37 protects GST from fraud where buyers take ITC and never pay suppliers. Rule 37A protects recipients when suppliers behave irresponsibly.

Together, these rules try to maintain fairness in the ITC ecosystem.

Also Read: ITC Time Limits & Late Claim Rules Under GST (Sec 16(4))