Section 17(2) and reversal of ITC on stock in cases where a manufacturer was earlier making supply of wholly taxable goods and post 22-09-2025, some goods manufactured out of the raw material in stock would be exempt from levy and some remains taxable.

By Adv (CA) Dr. Arpit Haldia

A dealer is having a raw material stock of Rs 50 Lakh taxable @ 18% on 31-03-2025 and post 01-04-2025 to 31-08-2025, he has purchased raw material worth Rs 25 Lakhs. For simple understanding, all those goods are in stock as on 22-09-2025. Now, from 22-09-2025, he would be manufacturing and selling goods which would be partly taxable and partly exempt from levy of tax. What would be the reversal under Section 17(2).

In earlier post, it was discussed that Section 18(4) is not applicable to such cases. Now 17(2) read with Rule 42 provides for calculation of reversal at two stages i.e. firstly on a tax period wise basis as per Rule 42(1) and then secondly per Rule 42(2) i.e. finally for the financial year before the due date for furnishing of the return for the month of September following the end of the financial year to which such credit relates, in the manner specified in sub-rule (1).

For the goods lying in stock as on 22-09-2025 out of the opening stock as on 01-04-2025, although finished goods have become exempted from levy of tax in F.Y. 2025-26, the credit pertains to financial year 2024-25. Thus, there would be no reversal as per Rule 42 in 2024-25 since there was no exempted sale in F.Y. 2024-25. Further while calculating reversal under Rule 42 for 2025-26, this credit would not be subjected to reversal even though used in making outward exempted supply since, credit has not been availed in F.Y. 2025-26. Therefore, even though stock was used in making outward exempt supply in F.Y. 2025-26 but since the credit was availed in F.Y. 2024-25 , therefore the same would not be subjected to reversal under Rule 42.

For the reversal of ITC regarding purchases worth Rs 25 Lakh in 2025-26, while applying Rule 42(1) at the level of respective tax period, there would not be any reversal as there was neither any exempt supply in that period and nor at that time it was intended that they would be used for making exempt supply. But while making reversal under Rule 42(2) for the entire year, since the rule uses the language “finally for the financial year…to which such credit relates, in the manner specified in the said sub-rule..”, therefore, reversal would be required to be made as per the process of Rule 42(1).

Thus, it appears as per Section 17(2) for the stock lying on 22-09-2025-

a) Out of the stock lying as on 01-04-2025- No reversal is required as the credit was availed in the previous year 2024-25.
b) Out of the purchases between 01-04-2025 to 31-08-2025-Reversal would be required to be made at the time of making annual calculation as per Rule 42(2).
c) Out of purchases between 01-09-2025 to 21-09-2025-Reversal would be required to be made in the monthly return of September 2025.