Core rule: section 17(3) and rule 40 limit credit to the taxable-use portion. Inputs directly related to taxable supplies are distinguished from those used for exempt supplies. Where direct attribution cannot be established, rule 40 provides a taxable-sales proportion, subject to the prescribed alternative-method process.
Example: a common overhead has NPR 13,000 input VAT. Assume its use cannot be directly attributed and the applicable taxable-sales share is 60%. The proportional credit is NPR 7,800; NPR 5,200 is not claimed as input VAT under that calculation.
This 60% illustration is not a universal formula for every purchase. A cost solely for exempt supplies is not made partly creditable just because the business also has taxable sales.
Keep the attribution schedule, sales classification and calculation basis. Apply blocked-input rules before assuming the allocated portion is fully available.