GST input tax credit: rules 37, 37A, 42 and 86B

Input tax credit (ITC) is where most of a company’s GST money sits, and four rules in the CGST Rules decide when you lose some of it, or when you can’t use it. None of them is new, but each needs a monthly check, and each has caught out well-run finance teams.

Rule 37: pay your suppliers within 180 days

The rule. If you don’t pay a supplier the invoice value and the tax within 180 days of the invoice date, you must reverse the credit you took on the unpaid part. This comes from the second proviso to section 16(2) of the CGST Act, and rule 37 says how.

When to reverse. In GSTR-3B for the tax period immediately after the 180 days run out (table 4(B)(2)). Since the rule was rewritten from 1 October 2022, the reversal is made in GSTR-3B itself.

Getting it back. When you do pay, you can re-claim the credit (shown in tables 4(A)(5) and 4(D)(1)). The usual time limit for claiming credit under section 16(4) doesn’t apply to a re-claim.

What it doesn’t cover. Supplies where you pay tax under reverse charge. Supplies made without consideration under Schedule I, and amounts added to value under section 15(2)(b), are treated as paid.

Interest. Interest under section 50 applies. Since the 2022 amendment to section 50(3), interest on credit wrongly taken is due only where the credit was actually used, at the notified rate of 18% a year; rule 88B sets how “used” is measured.

Example. You received an invoice dated 1 July 2026 for ₹1,18,000 (₹1,00,000 plus ₹18,000 GST) and took the full ₹18,000 credit. By the end of December 2026, when the 180 days run out, you’ve paid only ₹59,000. Half the invoice is unpaid, so you reverse ₹9,000. When you pay the balance in March 2027, you re-claim the ₹9,000 in that month’s return.

Unsettled: which return, exactly. The rule says the return for the tax period “immediately following” the 180 days, which most read as January 2027’s GSTR-3B in this example; some advisers report it in the December return filed in January. Also unsettled is whether to reverse only the unpaid share or the whole credit. The rule’s wording supports a proportionate reversal and that is the common practice, but some commentators read it more strictly.

Rule 37A: when your supplier doesn’t file GSTR-3B

The rule. If your supplier reported an invoice to you in GSTR-1 (so it showed in your GSTR-2B) but hasn’t filed its GSTR-3B for that period by 30 September after the end of the financial year, you must reverse the credit by 30 November. It was inserted by Notification 26/2022-Central Tax.

If you miss 30 November, you pay the amount with interest under section 50.

Getting it back. Once the supplier files the missing GSTR-3B, you can re-claim the credit in a later return.

Example. For 2025-26, a vendor billed you ₹50,000 of GST across three invoices. You took the credit. By 30 September 2026 the vendor still hadn’t filed GSTR-3B for two of those months, covering ₹30,000 of GST. You reverse ₹30,000 in a GSTR-3B filed by 30 November 2026. If the vendor files in January 2027, you re-claim it in a return after that.

The GST Network’s advisory of November 2023 says the reversal goes in table 4(B)(2). Courts have been sympathetic to buyers who paid in full, but the rule stands as written, so track it.

Rule 42: credit used for both taxable and exempt supplies

The rule. When inputs or input services are used both for taxable supplies and for exempt supplies (or for non-business purposes), you can only keep the share of credit that belongs to taxable supplies. Rule 42 gives the formula. Capital goods follow a similar rule (rule 43).

The monthly working, in short:

Take the common credit (C2): credit on inputs and services used for both kinds of supply.
D1, the exempt share = C2 × exempt turnover ÷ total turnover, for the month.
D2, the non-business share = 5% of C2, only where common credit is also used for non-business purposes.
Reverse D1 and D2 in GSTR-3B table 4(B)(1).

The year-end true-up. Rule 42(2) has you redo the calculation for the whole financial year, before the due date of the September return after the year ends. Reverse any shortfall (with interest) or take back any excess.

Example. In October 2026 your common credit is ₹2,00,000. Your turnover is ₹5 crore, of which ₹50 lakh is exempt (say, exempt healthcare or education services). D1 = ₹2,00,000 × 50 ÷ 500 = ₹20,000 to reverse for the month.

What counts as exempt turnover has quirks. For most businesses, interest on loans and deposits is left out of exempt supplies for this calculation (the explanation to rule 43 makes an exception only for banks and NBFCs). Ask your CA what counts for you.

Rule 86B: the 1% cash rule

The rule. If your taxable supplies (leaving out exempt and zero-rated supplies) are more than ₹50 lakh in a month, you can’t use the electronic credit ledger to pay more than 99% of that month’s output tax. At least 1% must be paid in cash. It has applied since 1 January 2021.

Exceptions. The rule doesn’t apply if, among others:

the proprietor, karta, managing director, any two partners, whole-time directors or committee members (as the case may be), or the business itself, paid more than ₹1 lakh of income tax in each of the last two financial years;
you received refunds of more than ₹1 lakh in the previous financial year for zero-rated supplies without tax, or for an inverted duty structure;
you have already paid more than 1% of your output tax in cash in the year so far;
you are a government department, public sector undertaking, local authority or statutory body.

The Commissioner can also lift the restriction after verification.

Example. In October 2026 your taxable supplies are ₹80 lakh and your output tax is ₹14,40,000. You have ample credit. Without an exception, you can use at most ₹14,25,600 of credit and must pay at least ₹14,400 in cash.

Rule 86B doesn’t take credit away; it only changes how you pay. Most profitable companies qualify for the income-tax exception, but you need to record why, and check it each year.

How to track these every month

Rule 37: run an ageing of supplier bills by invoice date, with GST. Anything unpaid at 180 days goes into next month’s reversal. Reverse in proportion to what’s unpaid.
Rule 37A: after 30 September each year, list suppliers whose GSTR-3B is missing for the year, with the credit you took from them. Reverse by 30 November and track re-claims.
Rule 42: tag each purchase line as taxable-only, exempt-only or common. Work out D1 (and D2 if relevant) every month, and diarise the true-up before the September return.
Rule 86B: check taxable supplies each month against ₹50 lakh. Record which exception applies, or pay 1% in cash.
Keep a credit register: credit taken, held, reversed and re-claimed, by bill and month. It makes the annual return (GSTR-9) and audit much easier.

How Dexta handles this

Rule 37. Dexta Books finds credit on bills still unpaid after 180 days and reverses it in the right month, then brings it back as bills are paid.
Rule 37A. Books reverses credit where a supplier didn’t file GSTR-3B by 30 September, and re-claims it when the supplier does.
Rule 42. Books works out the monthly reversal of common credit for exempt supplies, with the year-end true-up.
Rule 86B. GSTR-3B is worked out from your posted documents with the credit set-off posted, and the rule 86B 99% cap shown when it applies.
GSTR-2B matching. Import the portal’s GSTR-2B file, match it to your bills, and hold credit on bills not yet in 2B.
Input tax register. Credit by bill, head and month, with an Excel export.

This is general guidance, not legal advice.

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