Introduction
Input Tax Credit, commonly known as ITC, is the backbone of GST. Under normal GST rules, a registered taxpayer can claim ITC on eligible purchases used for business. However, certain situations require special treatment.
Section 18 of the CGST Act deals with availability of credit in special circumstances. It explains when a taxpayer can claim ITC on stock, semi-finished goods, finished goods and capital goods during a transition, and when ITC must be reversed.
These situations usually arise when a taxpayer moves from one tax position to another, such as:
- unregistered to registered;
- composition scheme to regular scheme;
- exempt supply to taxable supply;
- regular scheme to composition scheme;
- taxable supply to exempt supply;
- cancellation of registration;
- sale, merger, demerger or transfer of business; or
- sale of capital goods on which ITC was already taken.
For GST return filing, ITC reconciliation and GST notice support, businesses may visit TaxClear.in.
What Is the Purpose of Section 18?
Section 18 is based on a simple principle. If a taxpayer was earlier not eligible to take ITC but later becomes liable to pay GST on outward supplies, the law allows ITC on eligible stock and, in some cases, capital goods.
Similarly, if a taxpayer had earlier claimed ITC but later moves to a position where outward supplies are not taxable in the normal manner, the law requires reversal of ITC.
In simple words:
| Situation | GST Treatment |
|---|---|
| Earlier no ITC, now taxable output | ITC may become available |
| Earlier ITC taken, now no normal tax output | ITC may have to be reversed |
| Business transferred | Unutilised ITC may be transferred |
| Capital goods sold | Higher of prescribed ITC amount or tax on transaction value is payable |
Section 18(1): ITC Available in Special Circumstances
Section 18(1) covers cases where ITC becomes available because the taxpayer moves into a taxable GST position.
The law broadly allows ITC on:
- inputs held in stock;
- inputs contained in semi-finished goods;
- inputs contained in finished goods; and
- capital goods in specified cases.
However, the date on which stock is checked is very important.
1. Registration After Becoming Liable to Register
This applies where a person becomes liable for GST registration and applies for registration within 30 days from the date on which he becomes liable.
For example, a business was earlier unregistered. It crossed the turnover threshold and became liable to register. It applied for registration within 30 days and obtained GST registration.
In such a case, ITC is available on inputs held in stock, semi-finished goods and finished goods on the day immediately preceding the date from which the person becomes liable to pay tax.
Example
A trader becomes liable for GST registration on 25 August 2026 and applies within 30 days. He should check stock as on 24 August 2026. ITC may be claimed on eligible inputs contained in that stock.
| Particulars | Treatment |
|---|---|
| Status before threshold crossing | Unregistered |
| Status after crossing threshold | Liable for registration |
| Application time limit | Within 30 days |
| Stock date for ITC | Day immediately preceding liability date |
| ITC available on | Inputs in stock, semi-finished goods and finished goods |
| ITC on capital goods | Not covered in this clause |
2. Voluntary GST Registration
A person may voluntarily obtain GST registration even if turnover has not crossed the threshold. In this case, ITC becomes available from the date of grant of registration.
The taxpayer can claim ITC on inputs held in stock, semi-finished goods and finished goods on the day immediately preceding the date of grant of registration.
Example
A person voluntarily applies for GST registration and registration is granted on 10 September 2026. ITC may be claimed on eligible inputs held in stock on 9 September 2026.
| Particulars | Treatment |
|---|---|
| Registration type | Voluntary |
| Relevant date | Date of grant of registration |
| Stock date for ITC | Day immediately preceding grant date |
| ITC available on | Inputs in stock, semi-finished goods and finished goods |
| ITC on input services | Not available |
| ITC on capital goods | Not covered in this clause |
3. Composition Scheme to Regular Scheme
A composition taxpayer cannot normally collect GST from customers in the regular manner and cannot claim ITC. However, when the person exits the composition scheme and becomes liable to pay tax under the regular scheme, ITC becomes available.
This may happen when:
- turnover exceeds the composition limit;
- the taxpayer opts out of composition; or
- the taxpayer becomes ineligible for composition.
In such cases, ITC is available on:
- inputs held in stock;
- inputs contained in semi-finished goods;
- inputs contained in finished goods; and
- capital goods, after prescribed reduction.
The relevant date is the day immediately preceding the date from which the person becomes liable to pay tax under the regular scheme.
| Particulars | Treatment |
|---|---|
| Earlier status | Composition taxpayer |
| New status | Regular taxpayer |
| Stock date for ITC | Day immediately preceding regular tax liability |
| ITC available on inputs | Yes |
| ITC available on capital goods | Yes, after reduction |
| Form requirement | Form GST ITC-01 |
4. Exempt Supply Becomes Taxable
If a registered person was making exempt supplies and those supplies later become taxable, ITC becomes available.
This situation may arise when the Government withdraws an exemption notification or changes taxability of a product or service.
In this case, ITC may be claimed on:
- inputs held in stock;
- inputs contained in semi-finished goods;
- inputs contained in finished goods; and
- capital goods exclusively used for such exempt supply, after prescribed reduction.
The relevant date is the day immediately preceding the date from which the exempt supply becomes taxable.
| Particulars | Treatment |
|---|---|
| Earlier supply | Exempt |
| New supply | Taxable |
| Stock date | Day before supply becomes taxable |
| ITC on inputs | Available |
| ITC on capital goods | Available, after reduction |
| ITC condition | Inputs/capital goods must relate to such supply |
Capital Goods Credit Under Section 18(1)
For composition-to-regular and exempt-to-taxable situations, ITC on capital goods is also available. However, full ITC is not allowed if the capital goods were already used during the exempt or composition period.
The credit on capital goods must be reduced by the prescribed percentage.
Simple Illustration
Suppose capital goods were purchased in January and the supply becomes taxable in October. The capital goods were used during the earlier exempt period. Therefore, ITC is reduced for the period already used before becoming taxable.
The practical rule is to reduce credit by 5% per quarter or part thereof from the invoice date.
| Capital goods ITC | Example |
|---|---|
| Original ITC | ₹100 |
| Period used before eligibility | 3 quarters |
| Reduction @ 5% per quarter | ₹15 |
| Eligible ITC | ₹85 |
Section 18(2): One-Year Time Limit
Section 18(2) restricts ITC under Section 18(1). A taxpayer cannot take ITC in respect of any supply after the expiry of one year from the date of the tax invoice.
This means old stock may not always be eligible.
Example
If a taxpayer becomes eligible to claim ITC on 25 August 2026, invoice dates must be checked. ITC cannot be claimed if the invoice is older than one year from the relevant date.
| Item | Treatment |
|---|---|
| Invoice within one year | ITC may be available |
| Invoice older than one year | ITC not available |
| Applies to | ITC claimed under Section 18(1) |
Form GST ITC-01
To claim ITC under Section 18(1), the taxpayer must file Form GST ITC-01 within the prescribed time.
The practical compliance requirement is:
- file ITC-01 within 30 days from becoming eligible to claim ITC;
- disclose details of stock, semi-finished goods, finished goods and capital goods, as applicable;
- if ITC claim exceeds ₹2 lakh, obtain certification from a Chartered Accountant or Cost Accountant.
| Compliance Point | Requirement |
|---|---|
| Form | GST ITC-01 |
| Time limit | Within 30 days of eligibility |
| Stock details | Required |
| Capital goods details | Required where applicable |
| CA/CMA certificate | Required if ITC exceeds ₹2 lakh |
For GST ITC-01 filing, ITC computation and GST compliance support, businesses may use TaxClear’s GST services.
Section 18(3): Transfer of ITC on Business Reorganisation
Section 18(3) deals with transfer of unutilised ITC when there is a change in the constitution of a registered person.
This may happen due to:
- sale of business;
- merger;
- demerger;
- amalgamation;
- lease; or
- transfer of business.
The key condition is that there must be specific provision for transfer of liabilities.
Example
A Ltd. and B Ltd. merge into AB Ltd. Both companies have unutilised ITC in their electronic credit ledgers. If the merger arrangement includes transfer of liabilities, unutilised ITC can be transferred to the new entity in the prescribed manner.
| Situation | ITC Treatment |
|---|---|
| Sale of business with liabilities | ITC may be transferred |
| Merger with liabilities | ITC may be transferred |
| Amalgamation with liabilities | ITC may be transferred |
| Demerger | ITC apportioned based on value of assets |
| Transfer without liability clause | ITC transfer may be disputed |
ITC Transfer in Demerger
In case of demerger, ITC is apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.
Example
AB Ltd. is demerged into A Ltd. and B Ltd. AB Ltd. has unutilised ITC. The ITC will be distributed between A Ltd. and B Ltd. based on the value of assets transferred to each entity as per the demerger scheme.
Section 18(4): ITC Reversal When Regular Taxpayer Moves to Composition or Exempt Supply
Section 18(4) is the reverse of Section 18(1).
If a registered taxpayer who has taken ITC:
- opts to pay tax under the composition scheme; or
- his goods or services become wholly exempt,
then the taxpayer must reverse ITC.
Reversal applies to:
- inputs held in stock;
- inputs contained in semi-finished goods;
- inputs contained in finished goods; and
- capital goods, after prescribed reduction.
The relevant date is the day immediately preceding the date of switch-over or the date of exemption.
| Situation | ITC Treatment |
|---|---|
| Regular scheme to composition scheme | ITC reversal required |
| Taxable supply becomes exempt | ITC reversal required |
| Inputs in stock | Reverse proportionate ITC |
| Semi-finished/finished goods | Reverse embedded input ITC |
| Capital goods | Reverse based on remaining useful life |
ITC Reversal: Credit Ledger vs Cash Ledger
A common practical issue arises when the electronic credit ledger has insufficient balance.
The reversal is not based only on the balance available in the electronic credit ledger. It is based on eligible stock and capital goods held on the relevant date.
If the credit ledger balance is not enough, the balance amount must be paid through the electronic cash ledger.
Example
A taxpayer claimed ₹100 ITC on stock and used the credit for paying earlier GST liability. Later, the taxpayer shifts from regular scheme to composition scheme while the same stock remains unsold.
Even if the electronic credit ledger balance is nil, ITC reversal of ₹100 may still be required. The taxpayer may have to pay through the cash ledger.
How to Calculate ITC Reversal on Inputs
For inputs held in stock, semi-finished goods and finished goods, ITC reversal is generally calculated on the basis of corresponding tax invoices.
If invoices are not available, the taxpayer may use the prevailing market price, supported by reasonable valuation and documents.
| Situation | Reversal Basis |
|---|---|
| Invoice available | Based on invoice ITC |
| Invoice not available | Based on prevailing market price |
| Stock used partly | Proportionate calculation |
| Credit ledger insufficient | Pay balance through cash ledger |
ITC Reversal on Capital Goods Under Section 18(4)
For capital goods, useful life is generally taken as five years, i.e. 60 months.
The amount attributable to the remaining useful life must be reversed.
Example
Capital goods had original ITC of ₹100. The taxpayer used them for 4 years and 7 months. Therefore, only 5 months of useful life remain out of 60 months.
Reversal amount:
₹100 × 5 / 60 = ₹8.33
| Particulars | Amount |
|---|---|
| Original ITC | ₹100 |
| Total useful life | 60 months |
| Remaining useful life | 5 months |
| ITC reversal | ₹8.33 |
Section 18(6): Sale of Capital Goods or Plant and Machinery
Section 18(6) applies when a registered person supplies capital goods or plant and machinery on which ITC has been taken.
In such a case, the taxpayer must pay the higher of:
- ITC taken on such capital goods reduced by prescribed percentage; or
- tax on transaction value under Section 15.
Example
A machine was purchased and ITC of ₹100 was taken. It is sold after 3 quarters.
Reduced ITC:
₹100 – 15% = ₹85
Tax on transaction value:
₹70
Amount payable:
Higher of ₹85 and ₹70 = ₹85
| Particulars | Amount |
|---|---|
| Original ITC | ₹100 |
| Reduction @ 5% for 3 quarters | ₹15 |
| Reduced ITC | ₹85 |
| Tax on transaction value | ₹70 |
| GST payable | ₹85 |
Scrap Sale of Certain Capital Goods
There is a special proviso for certain items supplied as scrap, such as:
- refractory bricks;
- moulds and dies;
- jigs; and
- fixtures.
Where these are supplied as scrap, the taxable person may pay tax on transaction value under Section 15.
Quick Summary of Section 18
| Section | Situation | ITC Treatment |
|---|---|---|
| 18(1)(a) | Registration within 30 days after becoming liable | ITC on inputs in stock |
| 18(1)(b) | Voluntary registration | ITC on inputs in stock |
| 18(1)(c) | Composition to regular | ITC on inputs and capital goods |
| 18(1)(d) | Exempt supply becomes taxable | ITC on inputs and capital goods |
| 18(2) | Invoice older than one year | ITC not available |
| 18(3) | Business sale/merger/demerger/transfer | Unutilised ITC transfer allowed |
| 18(4) | Regular to composition/exempt | ITC reversal required |
| 18(6) | Sale of capital goods/plant machinery | Higher of reduced ITC or transaction value tax |
Practical Checklist for GST Taxpayers
Before claiming or reversing ITC under Section 18, check:
- Whether the taxpayer is moving from unregistered to registered.
- Whether registration application was filed within 30 days where required.
- Whether registration is voluntary.
- Whether the taxpayer is moving from composition to regular.
- Whether exempt supply has become taxable.
- Whether invoices are within one year.
- Whether ITC-01 is required.
- Whether CA/CMA certificate is required.
- Whether capital goods credit must be reduced.
- Whether business transfer includes transfer of liabilities.
- Whether ITC reversal is required due to composition/exemption/cancellation.
- Whether capital goods are being sold.
- Whether transaction value tax or reduced ITC is higher.
For GST return filing, ITC-01, ITC reversal, GST audit support and notice handling, visit TaxClear.in.
Key Takeaways
- Section 18 deals with ITC in special circumstances.
- ITC may become available when a person moves into the GST taxable chain.
- ITC may need to be reversed when a person moves out of normal taxable supply.
- ITC on stock is checked on the day immediately preceding the relevant event.
- ITC on capital goods is available only in specified cases and after reduction.
- Invoices older than one year are not eligible for ITC under Section 18(1).
- ITC-01 filing is important for claiming credit.
- Business transfer ITC is allowed only where liabilities are also transferred.
- Sale of capital goods requires comparison between reduced ITC and tax on transaction value.
Conclusion
Section 18 of the CGST Act is important because it deals with transition situations. A taxpayer may become eligible for ITC when moving from unregistered to registered, composition to regular, or exempt to taxable supplies. At the same time, ITC reversal may be required when moving from regular to composition or from taxable to exempt supplies.
The key to correct GST compliance is identifying the relevant event date, checking eligible stock, reviewing invoice dates, calculating capital goods credit correctly and filing the required form within time.
Businesses should not claim or reverse ITC casually in such cases. A proper working paper should be maintained for stock, invoices, capital goods, credit ledger and cash ledger adjustments.
For professional GST compliance, ITC computation, ITC-01 filing and GST notice support, visit TaxClear.in.
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