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46. Case Study 2: Manufacturer with Taxable and Exempt Supplies

46.1 Facts

Narmada Agro Foods Pvt. Ltd., Rajkot, Gujarat, mills wheat. It sells branded, pre-packaged and labelled atta at 5% and loose, unbranded atta which is exempt. Wheat is bought without GST. Its credits come from packing material, machinery spares, services and capital goods. The figures for January 2026 are:

Item

Amount (Rs.)

Treatment

Turnover: branded atta (5%)

60,00,000

Taxable

Turnover: loose atta (exempt)

40,00,000

Exempt, value E

ITC on printed pouches and labels

1,40,000

Only for taxable supplies (T4)

ITC on plain bags for loose atta

20,000

Only for exempt supplies (T2)

ITC on insurance of the director's car

15,000

Blocked, section 17(5) (T3)

ITC on repairs, security, rent, audit (common)

1,00,000

Common credit (C2)

Total ITC for the month (T)

2,75,000

In January 2026 the company also bought a common grain cleaning and packing line for Rs. 30,00,000 plus GST of Rs. 5,40,000 (CGST Rs. 2,70,000, SGST Rs. 2,70,000). For the whole of FY 2025-26, common credit was Rs. 12,00,000, exempt turnover Rs. 4,20,00,000 and total turnover Rs. 10,50,00,000. Monthly reversals under rule 42 during the year added up to Rs. 4,52,000.

46.2 Issues

  • Monthly reversal of common credit on inputs and input services under rule 42.
  • Treatment of the common capital good under rule 43.
  • Annual recomputation under rule 42(2) and interest on the shortfall.

46.3 Analysis and computation

Section 17(2) allows credit only to the extent inputs are used for taxable supplies. Rules 42 and 43 give the formula. Credits used only for exempt supplies (T2) and blocked credits (T3) are not available at all. Credits used only for taxable supplies (T4) are fully available. Only the common pool (C2) is split in the ratio of exempt turnover to total turnover.

T: total ITC

Rs. 2,75,000

Less: T2 exclusively exempt

Rs. 20,000

Less: T3 blocked

Rs. 15,000

C1

Rs. 2,40,000

Less: T4 exclusively taxable

Rs. 1,40,000

C2: common credit

Rs. 1,00,000

D1 = C2 x E / F = 1,00,000 x 40,00,000 / 1,00,00,000

Rs. 40,000

C3 = C2 less D1 (no non-business use, so D2 is nil)

Rs. 60,000

Net ITC credited = T4 + C3

Rs. 2,00,000

Table 4A shows the full Rs. 2,75,000. Table 4B(1) shows Rs. 75,000 (T2, T3 and D1), split equally between CGST and SGST.

Illustration 208: Rule 43 on the common packing line

Step 1: Under rule 43 as amended, the full credit on a common capital good (Tc = Rs. 5,40,000) is credited to the ledger when received.

Step 2: The useful life is taken as five years, so the credit attributable to each month is Tm = Tc / 60 = Rs. 9,000.

Step 3: For January 2026, Te = Tm x E / F = 9,000 x 40% = Rs. 3,600 (CGST Rs. 1,800, SGST Rs. 1,800).

Step 4: Te is added to output tax in every month of the residual life, using that month's ratio. If the line had been used only for loose atta, no credit would be available; if only for branded atta, full credit with no monthly reversal.

Annual recomputation. Rule 42(2) requires the reversal to be worked out again for the whole year on annual figures. Monthly ratios move with the season (loose atta sells more in some months), so the monthly total rarely matches the annual figure.

Annual C2

Rs. 12,00,000

Annual E / F = 4,20,00,000 / 10,50,00,000

40%

D1 for the year = 12,00,000 x 40%

Rs. 4,80,000

Less: total monthly D1 reversed during the year

Rs. 4,52,000

Shortfall to be added to output tax

Rs. 28,000

Illustration 209: Interest on the rule 42 shortfall

Step 1: The shortfall must be added to output tax in a month not later than September 2026, and interest at the section 50(1) rate runs from 1 April 2026 to the date of payment.

Step 2: The company paid it in the GSTR-3B for July 2026, filed on 20 August 2026. Days from 1 April 2026 to 20 August 2026, both included: 30 + 31 + 30 + 31 + 20 = 142.

Step 3: CGST interest = 14,000 x 18% x 142 / 365 = Rs. 980. SGST interest is the same.

Step 4: Total: tax Rs. 28,000 plus interest Rs. 1,960.

Step 5: Had the annual figure been lower than the monthly total, the excess reversal could be claimed back in the same window, without interest.

46.4 Compliance and documentation

  • Monthly: T2, T3 and D1 in Table 4B(1) of GSTR-3B; Te under rule 43 also in Table 4B(1).
  • Annual: shortfall under rule 42(2) in Table 4B(1) of a return up to September 2026, interest in Table 5.1; excess reversal reclaimed in Table 4A(5).
  • GSTR-9 for FY 2025-26 by 31 December 2026: reversals under rules 42 and 43 in Table 7, and the annual adjustment reported where the form requires.
  • A monthly rule 42 working file tied to the sales register (E and F) and to the ITC register (T1 to T4).

Key point

Lessons

Tag every purchase at the time of booking as T1, T2, T3, T4 or common. Tagging at the year end leads to disputes.

Interest on the annual shortfall runs from 1 April. Doing the true-up in July rather than September saves interest.

Rule 43 has its own monthly working for common capital goods. Do not mix capital goods credit into C2.

Chapter summary

• Only common credit is apportioned; exclusively exempt and blocked credits are not taken at all.

• January 2026 reversal under rule 42 was Rs. 40,000 and under rule 43 Rs. 3,600.

• The annual recomputation gave a shortfall of Rs. 28,000, paid with interest of Rs. 1,960 for 142 days.

• Early true-up and clean tagging of purchases keep interest and disputes low.

© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.