GST Section 18 Explained: Input Tax Credit in Special Circumstances under CGST Act

Section 18 of the CGST Act, 2017 outlines the provisions for claiming or reversing Input Tax Credit (ITC) under special circumstances such as new or voluntary registration, switching from composition scheme to regular tax scheme, exempt supplies becoming taxable, or changes in business structure like mergers or transfers.

It allows eligible taxpayers to claim ITC on stock and capital goods under prescribed conditions and within specific time limits, while also mandating reversal of credit when switching to the composition scheme or when supplies become exempt. It includes special rules for the transfer of ITC during business reorganizations and on the supply of capital goods. All computations and conditions must follow rules as prescribed by the government.

GST Section 18: Availability of Input Tax Credit in Special Circumstances

Understanding the intricacies of Input Tax Credit (ITC) under the GST law can be quite complex. One of the critical provisions governing ITC in transitional and unique business circumstances is Section 18 of the CGST Act, 2017. As always, AUBSP brings you a simplified, comprehensive, and accurate explanation to help you navigate these GST regulations with ease.

Introduction to Section 18 of CGST Act

Section 18 of the Central Goods and Services Tax (CGST) Act, 2017 deals with the entitlement to Input Tax Credit in specific circumstances. These situations typically arise when a person transitions from an unregistered to a registered status, moves out of the composition scheme, begins supplying taxable goods/services, or undergoes structural changes in business like mergers or transfers.

Let us understand each clause under this section and what it means for you as a taxpayer.

📌 18(1)(a): New Registration

• When? Within 30 days of liability
• What You Get: ITC on inputs (stock, semi-finished, finished goods)
• Condition: Registration must be granted
• Effective Date: Day before becoming liable

📌 18(1)(b): Voluntary Registration

• Applies To: Voluntary GST registration under Sec 25(3)
• What You Get: ITC on stock inputs
• Condition: Registration granted
• Effective Date: Day before grant of registration

📌 18(1)(c): Switching from Composition to Regular

• What You Get: ITC on stock inputs & capital goods
• Condition: Reductions as prescribed
• Effective Date: Day before becoming liable under Sec 9

📌 18(1)(d): Exempt Supply Becomes Taxable

• What You Get: ITC on stock & capital goods used
• Condition: Reductions as prescribed
• Effective Date: Day before supply becomes taxable

📌 18(2): Invoice Time Limit

• Rule: No ITC on invoices older than 1 year
• Applies To: All relevant transactions
• Timing: Count 1 year from invoice date

📌 18(3): Business Transfer / Merger

• What You Get: Transfer of unutilized ITC
• Condition: Liabilities also transfer
• Timing: As per GST rules

📌 18(4): Switching to Composition / Exempt

• What You Do: Pay back ITC on stock & capital goods
• How?: Use credit or cash ledger
• Timing: Day before the change

📌 18(5): ITC/Reversal Calculation

• What It Covers: Method to compute ITC or reversal
• Condition: As prescribed under rules
• Timing: Not applicable

📌 18(6): Capital Goods Supply

• Requirement: Pay higher of:
  • Reduced ITC (as per rules), or
  • Tax on transaction value
• Exception: Scrap items
• Timing: At time of supply

Detailed Explanation of Each Clause

Credit in Case of New Registrants – Section 18(1)(a)

If you apply for GST registration within 30 days of becoming liable and your registration is granted, you are entitled to claim ITC on inputs held in stock, including semi-finished and finished goods. However, this claim only applies to stock held one day before the date you became liable to pay GST.

Voluntary Registration – Section 18(1)(b)

In case you opt for registration voluntarily (not due to liability), you can still claim ITC on stock inputs held on the day before registration is granted. This is to encourage early compliance even when registration isn’t mandatory.

Switching from Composition Scheme – Section 18(1)(c)

If you’re transitioning from the Composition Scheme to a regular GST scheme, you become eligible for ITC on:

• Inputs in stock
• Inputs in semi-finished/finished goods
• Capital goods

Note: ITC on capital goods must be reduced by a prescribed percentage to reflect usage prior to transition.

Exempt Supply Becoming Taxable – Section 18(1)(d)

When your goods/services were previously exempt but later become taxable, you are entitled to claim ITC on inputs and capital goods related to those supplies. The stock must be held immediately before the supply becomes taxable, and ITC on capital goods will again be subject to percentage-based reduction.

Time Limit for Availing Credit – Section 18(2)

It’s crucial to remember that you cannot claim ITC on any supply where the tax invoice is more than one year old from the date of the ITC claim under Section 18(1). Timely action is essential.

Business Reorganization – Section 18(3)

In the event of a business transfer, merger, demerger, lease, or sale, the registered person can transfer any unutilized ITC in their electronic credit ledger to the new entity. This transfer must comply with prescribed rules and assumes that liabilities are also transferred.

Reversal of Credit When Switching or Exempting – Section 18(4)

If you choose to opt into the Composition Scheme or your supplies become wholly exempt, you must reverse your ITC:

• Equivalent to the inputs in stock, semi-finished/finished goods, and capital goods
• Reduction in capital goods credit as prescribed
• Debit through electronic credit ledger or cash ledger

Any remaining ITC in your ledger will lapse after this payment.

Method of Calculation – Section 18(5)

The exact calculation methodology for claiming and reversing ITC under this section will be provided via rules prescribed by the Government. This ensures uniformity and clarity.

ITC on Supply of Capital Goods – Section 18(6)

When you sell capital goods or plant and machinery on which ITC was availed, you need to pay back the higher of:

• The reduced ITC (based on usage) or
• The tax on transaction value

Exception: If these items (like jigs, dies, moulds, or fixtures) are supplied as scrap, you only need to pay tax on the transaction value.

Important Dates Table

FAQs on Section 18 of the CGST Act

What is the main purpose of Section 18 of the CGST Act?
Section 18 governs the availability and reversal of Input Tax Credit (ITC) in special circumstances such as registration, scheme changes, exempt to taxable supply transitions, and business restructuring.

Who can claim ITC on inputs held in stock under Section 18(1)(a)?
A person who registers within 30 days of becoming liable for GST and whose registration is granted can claim ITC on inputs, semi-finished, and finished goods held in stock the day before liability arises.

Can a voluntarily registered person claim ITC on stock inputs?
Yes, under Section 18(1)(b), a person who takes voluntary registration can claim ITC on inputs and goods held in stock on the day immediately preceding the registration date.

What happens when a person switches from the composition scheme to the regular scheme?
Under Section 18(1)(c), such a person is entitled to claim ITC on inputs, semi-finished or finished goods, and capital goods held in stock the day before becoming liable under the regular scheme, subject to prescribed reductions on capital goods.

Is ITC allowed when exempt supplies become taxable?
Yes, Section 18(1)(d) allows claiming ITC on inputs and capital goods related to exempt supplies that later become taxable, with prescribed reductions on capital goods.

What is the time limit for claiming ITC under Section 18?
Section 18(2) states that ITC cannot be claimed for supplies received more than one year before the date of invoice.

How is ITC handled during business mergers or transfers?
Section 18(3) permits transfer of unutilized ITC from the transferor to the transferee business during sale, merger, demerger, amalgamation, lease, or transfer, subject to prescribed rules.

What must a taxpayer do when opting for the composition scheme after availing ITC?
As per Section 18(4), the taxpayer must pay an amount equivalent to the credit on inputs and capital goods held in stock before opting for composition, through electronic credit or cash ledger.

How is the amount of ITC credit or reversal calculated?
Section 18(5) mandates that the calculation method for credit entitlement or reversal will be prescribed by government rules.

What are the rules for ITC on capital goods sold or supplied?
According to Section 18(6), the taxpayer must pay the higher of the reduced ITC amount or tax on transaction value for capital goods sold, except for scrap items like refractory bricks or moulds.

Does ITC on capital goods require any reduction?
Yes, credit on capital goods under Sections 18(1)(c) and 18(1)(d) must be reduced by prescribed percentage points to account for prior use.

When does the credit on inputs or capital goods lapse after reversal?
Under Section 18(4), any remaining ITC balance in the electronic credit ledger lapses after the taxpayer pays the reversal amount upon opting for composition or exemption.

Can ITC be claimed on goods supplied after the prescribed time limit?
No, ITC on supplies where the invoice date is older than one year cannot be claimed as per Section 18(2).

Is transfer of ITC automatic on business restructuring?
No, transfer of ITC during business restructuring must comply with specific rules and conditions laid down under Section 18(3).

What is the significance of the prescribed percentage reduction on capital goods?
This reduction accounts for the portion of capital goods’ use before the change in registration status or supply classification, ensuring only eligible ITC is claimed or reversed.

Does Section 18 apply to both goods and services?
Yes, the provisions apply to both goods and services as part of inputs or capital goods related to the taxable supplies.

When did Section 18 come into force?
Section 18 was enforced from 1st July 2017, as notified by Notification No. 9/2017-Central Tax dated 28th June 2017.

What happens if the taxpayer does not pay the reversal amount on opting for composition?
Failure to pay the reversal amount results in lapsing of ITC balances, and non-compliance may attract penalties under GST laws.

Can ITC be claimed on stock held after the effective date of registration or scheme change?
No, ITC can only be claimed on stock held the day immediately preceding the effective date of registration, scheme change, or supply becoming taxable.

Are there exceptions for calculating tax on scrap items?
Yes, for scrap items like refractory bricks, moulds, dies, jigs, and fixtures, tax is payable on transaction value rather than ITC reversal, as per Section 18(6).

Section 18 plays a pivotal role for businesses during registration transitions, scheme changes, or business restructurings. Understanding its nuances ensures that your business not only stays compliant but also maximizes ITC benefits wherever possible.

At AUBSP, our goal is to demystify complex tax laws for you with authentic, rule-based interpretation. We strongly advise consulting GST rules or expert guidance when applying these provisions, especially when calculating ITC on capital goods or transferring credits during mergers.

For more such accurate and detailed GST updates, continue to follow AUBSP.com — your trusted guide in tax and accounting.