Reversal of ITC on Manufacturing Exempt Supplies in TallyPrime

Under GST, if you manufacture exempt supplies, you are not allowed to claim full Input Tax Credit (ITC) on the inputs and input services used for manufacturing.

Instead, you must reverse the proportionate ITC related to exempt supplies.

TallyPrime allows you to manage this reversal efficiently and ensures your GST returns reflect accurate values.

Let’s understand how this works, step by step.

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1. What Is ITC Reversal for Exempt Supplies?

When you manufacture both taxable and exempt goods, you cannot claim full ITC on your purchases.

You must reverse the ITC that relates to the exempt portion.

This is done to comply with Rule 42 of CGST Rules, which mandates proportionate reversal.

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2. Example Scenario: Reversal of ITC on Manufacturing Exempt Supplies in TallyPrime

You manufacture:

• Taxable goods worth ₹8,00,000
• Exempt goods worth ₹2,00,000

You purchase raw materials and services with total GST paid = ₹1,00,000

Now, since 20% of your output is exempt, 20% of ₹1,00,000 = ₹20,000 must be reversed.

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3. How to Record Reversal of ITC on Manufacturing Exempt Supplies in TallyPrime

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Step 1: Enable GST

1. Go to F11 (Features) > Statutory & Taxation
2. Enable Goods and Services Tax (GST)
3. Set your state and GST registration type

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Step 2: Create a Ledger for ITC Reversal

1. Go to Gateway of Tally > Accounts Info > Ledgers > Create
2. Name: ITC Reversal – Exempt Supplies
3. Under: Duties & Taxes
4. Type of Duty/Tax: GST
5. GST Type: Reversals
6. Set Nature of Adjustment: Reversal of ITC (Rule 42)

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Step 3: Create a Journal Voucher

1. Go to Accounting Vouchers > F7: Journal
2. Press Alt + J to select the GST Adjustment voucher
3. In the voucher:
   • Debit: ITC Reversal – Exempt Supplies = ₹20,000
   • Credit: Input CGST, SGST, IGST based on original purchases
4. Narration: “ITC reversal for exempt supplies for the month of [Month]”

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4. How Reversal of ITC on Manufacturing Exempt Supplies Reflects in GST Returns in TallyPrime

Once recorded, the reversal will be:

• Shown under GSTR-3B > Eligible ITC > ITC Reversed (Rule 42)
• Adjusted automatically from the ITC available

This ensures your net ITC claim is accurate, and you remain compliant with GST law.

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5. Where to View Reversal of ITC on Manufacturing Exempt Supplies in TallyPrime?

Go to:

• Gateway of Tally > Display More Reports > Statutory Reports > GST > GSTR-3B
• You will see the reversal entry under ITC Reversed – Others

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6. Benefits of Managing ITC Reversal in TallyPrime

• Ensures GST compliance
• Helps avoid interest or penalties
• Makes GST filing easier with automated reporting
• Keeps your ITC claims accurate and transparent

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7. Conclusion

If you’re manufacturing exempt goods, reversing ITC in TallyPrime is essential.

It ensures you’re not claiming more input tax credit than allowed under GST rules.

With proper ledger setup and journal entry, TallyPrime simplifies the entire process and reflects the reversal in your GST returns automatically.

Always perform this monthly or as per your reporting frequency to stay compliant and audit-ready.