HOW TO REVERSAL ITC IN EXEMPT SUPPLY OF GOODS IN MANUFACTURE OIL MILL UNIT. EX: COTTON CAKE EXEMPT SUPPLY ITC REVERSAL FORMULA SECTION 42 OR 43 

Reply—Under section 17(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Under Rule 42(1) the input tax credit in respect of inputs or input services, which attract the provisions of sub-section (1) or sub-section (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the  manner prescribed. 

In our opinion, tax payer is required to reverse the ITC on inputs which are being used commonly in taxable and tax free goods. 

The portion of ITC pertaining to exempted supplies is calculated by the following formula:

ITC pertaining to exempted supply=     Exempted turnover X common credit / Total turnover

The formula calculates the amount by the proportionate method. Such amount is deemed to be the amount of ITC pertaining to exempted supplies and the assessee cannot avail the benefit of it.

Such excess credit shall be reversed by the registered person in the month not later than the month of September following the end of the financial year to which such credit relates and the said person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50 for the period starting from the first day of April of the succeeding financial year till the date of payment. (refer rule 42 of CGST Rules)