GST Rule 42: A Common-Credit Working with a Recheck

A business has taxable sales ₹8 lakh, exempt sales ₹2 lakh and shared input credits. The useful result is a working that explains the facts, the calculation or classification, and the evidence behind the conclusion. This guide shows how to prepare that working and where a reviewer should investigate before accepting the result.

Scope and applicable period

Indian GST; apply the law, notification and return version for the transaction’s own period. The worked figures are illustrative, not a declaration of a newly notified rate.

Verification date: 11 October 2026. Figures and rates identified as assumptions are teaching examples; apply the stated conditions and the actual facts to a real assignment.

The key principle

Rule 42 concerns credits on inputs and input services, with separate identification of non-business, exempt, blocked and exclusively taxable use. The exempt-turnover proportion applies to the common pool, not indiscriminately to every credit. Capital-goods credits belong to a different working. Monthly calculations also need the prescribed annual review, so retain the classification and adjustment history.

Worked example

The ₹2,000 calculation illustrates the exempt-supply component only. If common inputs or services also serve non-business purposes, the separately prescribed non-business component must be considered. Do not assume this simplified example completes the whole Rule 42 computation. Keep exclusively taxable credit outside the common reversal pool and blocked credit outside eligible credit. Reconcile the annual adjustment with the earlier monthly amounts so the same reversal is not counted twice.

A practical sequence

Classify each credit item as directly attributable, blocked or part of the common pool before applying the formula. Identify the relevant turnover inputs and period, and reconcile them to the returns.

Keep non-business treatment and other prescribed components separate from the simplified example. Perform the applicable annual adjustment and trace reversals or claims to the return.

A clean common-credit schedule should explain both excluded invoices and the amounts entering the calculation.

Keep transaction facts and return treatment separate

GST work involves several linked questions: what was supplied, which registration is involved, when liability arises, how it is valued and whether credit is available. A correct accounting entry does not answer all of them. Build the working at invoice level wherever practical, with transaction dates and document references. Reconcile values and tax separately, including amendments and reversals. When a rule or rate changes, use the notified effective date and conditions for the actual transaction; a Council recommendation or a software master update is not, by itself, the legal commencement of the change.

Evidence checklist

Keep the following records linked to the same entity, period and working version. Identify missing items explicitly; a checked box should mean the document was examined and supports the stated conclusion.

• Credit register classified by use
• Taxable and exempt turnover support
• Blocked-credit and non-business assessment
• Monthly common-credit calculations
• Annual recomputation and adjustment history

Common mistakes and how to avoid them

• Applying the ratio to all input credit. Compare the conclusion with the credit register classified by use and resolve any conflicting facts.
• Including capital goods in the same pool. Trace the affected item to the blocked-credit and non-business assessment before finalising the working.
• Booking an annual adjustment without netting monthly reversals. Use the annual recomputation and adjustment history to make the final position and remaining exceptions clear.

Before you finalise

Recheck the example’s assumptions against the actual assignment, resolve the identified exceptions and make the final figure or conclusion traceable to its source. Preserve the reviewed version and the reason for material changes. For this task, the annual recomputation and adjustment history should agree with the conclusion presented to the client, reviewer or authority.

Frequently asked question

Does exempt turnover mean all credit must be reversed proportionately? No. First classify exclusive use and restrictions; the proportion is applied to the relevant common pool.

Sources and further reading

• CBIC — Rule 42, input-credit attribution
• GSTN — GSTR-2B FAQs

Related guide: Blocked itc section 17 5 common expenses.