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Indirect Tax Laws and Practice · Input Tax Credit

ITC in Special Circumstances under Section 18 CGST

Updated 11 October 2026 · Fact-checked

Section 18 of the CGST Act lets you take credit on stock (and sometimes capital goods) when your status changes, such as new registration, leaving composition, or exempt supply becoming taxable. It requires reversal when you enter composition or supplies turn wholly exempt. Unutilised credit moves on a business transfer, and capital goods sold need a payment of the higher amount.

Understand Special Cases: Capital Goods, Change in Constitution and Transitions

Normal ITC is taken when you receive goods or services. But sometimes your tax status changes in the middle. You may be newly registered, you may leave the composition scheme, or your exempt product may turn taxable. Section 18 handles these cases. It gives you credit for tax you paid earlier, or takes back credit you can no longer justify.

There are two directions. Credit is allowed in four cases under Section 18(1): (a) you register within thirty days of becoming liable, (b) you take registration voluntarily under section 25(3), (c) you leave composition (section 10) and become a regular taxpayer under section 9, and (d) an exempt supply becomes taxable. Credit is reversed under Section 18(4) when you opt for composition or your supplies become wholly exempt.

The credit is measured on the day immediately before the change. For cases (a) and (b), it covers inputs in stock and inputs contained in semi-finished or finished goods in stock. Capital goods are not covered in these two cases. For case (c), capital goods are also covered. For case (d), you get credit on stock relatable to the exempt supply and on capital goods used exclusively for that exempt supply. In (c) and (d), credit on capital goods is reduced by prescribed percentage points. Rules prescribe the conditions and the manner of calculation.

A time limit applies. Under Section 18(2), you cannot take credit under sub-section (1) on a supply if one year has passed from the date of the tax invoice.

Two more situations matter. If the business is sold, merged, demerged, amalgamated, leased or transferred with specific provisions for transfer of liabilities, the unutilised credit in the electronic credit ledger can be transferred (Section 18(3) and Rule 41). If you sell capital goods on which you took ITC, Section 18(6) makes you pay the higher of two amounts: the ITC taken less prescribed percentage points, or the tax on the transaction value.

Key rules to remember

Credit on entry (Section 18(1)(a) and (b))
Eligible credit = ITC on inputs in stock + inputs contained in semi-finished and finished goods in stock, on the day before liability or grant of registration
No credit on capital goods. For (a), registration must be applied for within 30 days of becoming liable. For (b), the date is the day before grant of registration.
Credit on exit from composition (Section 18(1)(c))
Eligible credit = ITC on inputs in stock + inputs in semi-finished/finished goods + capital goods (reduced by prescribed percentage points), on the day before liability under section 9
The reduction applies only to capital goods.
Exempt supply becomes taxable (Section 18(1)(d))
Credit on stock relatable to the exempt supply + capital goods used exclusively for it (capital goods reduced by prescribed percentage points)
Measured on the day before the supply becomes taxable.
Payment on opting for composition or wholly exempt supplies (Section 18(4))
Amount payable = ITC on inputs in stock + inputs in semi-finished/finished goods + capital goods, with prescribed percentage points reduction, on the day before the option or exemption
Paid by debit of the electronic credit ledger or cash ledger. Any balance in the credit ledger then lapses.
Sale of capital goods on which ITC was taken (Section 18(6))
Payable = higher of (ITC taken on the capital goods less prescribed percentage points) and (tax on transaction value under section 15)
For refractory bricks, moulds, dies, jigs and fixtures sold as scrap, tax on the transaction value may be paid.
Time limit (Section 18(2))
Credit under 18(1) not allowed after one year from the date of the tax invoice
Applies to each supply, not to the date of registration.
Transfer of business (Section 18(3), Rule 41)
Transfer unutilised credit in ITC-02; demerger credit is apportioned in the ratio of the value of assets of the new units
Value of assets means the entire assets of the business, whether or not ITC was taken on them.

How to solve Special Cases: Capital Goods, Change in Constitution and Transitions questions

Use this order for any Section 18 question.

  1. 1Identify the event: new registration, voluntary registration, exit from composition, exempt turning taxable, entry into composition, supplies becoming wholly exempt, business transfer, or sale of capital goods.
  2. 2Decide the direction: credit is taken in the first four events, and reversal is needed in composition entry or wholly exempt supplies.
  3. 3Fix the reference date, usually the day immediately before the change.
  4. 4List what is covered: inputs in stock and in semi-finished or finished goods always; capital goods only where the section includes them.
  5. 5Check conditions: the 30-day registration window, the one-year invoice limit, and the prescribed percentage reduction on capital goods. Use the percentage given in the question.
  6. 6Calculate the amount, using only tax on goods that are actually held, and state the ledger used.
  7. 7For a transfer of business, check that liabilities are transferred specifically, then name ITC-02, the practising CA or CMA certificate and the transferee's acceptance.
  8. 8State the final amount and the consequence, such as lapse of the balance.

Quickest way: Three-question scan

When to use it: Use for MCQs and short case questions where you must pick the correct treatment quickly.

  1. Ask: is the person becoming regular or becoming composition or exempt? Becoming regular means credit. Going to composition or wholly exempt means pay back.
  2. Ask: are capital goods covered? Not in 18(1)(a) and (b). Yes in (c), (d) and (4), with a percentage reduction.
  3. Ask: any time gate? The invoice must be within one year, and registration must be applied for within 30 days for (a).

Common mistakes in Special Cases: Capital Goods, Change in Constitution and Transitions

  • Allowing credit on capital goods for a newly registered person.

    Students assume all stock includes capital goods.

    Fix: Section 18(1)(a) and (b) cover only inputs and inputs in semi-finished or finished goods. Capital goods are covered only in (c) and (d).

  • Taking credit on stock when registration was applied for after 30 days.

    The 30-day condition is overlooked.

    Fix: Check the gap between becoming liable and applying. Under (a), the application must be within thirty days.

  • Ignoring the one-year invoice limit.

    Students treat stock credit as unlimited in time.

    Fix: Under 18(2), no credit if one year has passed from the date of the tax invoice for that supply.

  • Letting the credit ledger balance remain after opting for composition.

    Students stop at the payment calculation.

    Fix: After paying the amount under 18(4), the balance of credit in the electronic credit ledger lapses.

  • Paying only the ITC amount on sale of capital goods.

    The 'whichever is higher' test is missed.

    Fix: Compare ITC taken less prescribed percentage points with tax on the transaction value, and pay the higher.

  • Splitting credit on demerger by turnover or by credit-linked assets.

    The apportionment base in Rule 41 is forgotten.

    Fix: Apportion in the ratio of the value of assets of the new units as per the demerger scheme, counting the entire assets whether or not ITC was taken.

Worked examples

Example 1

Kaveri Traders became liable to register on 1 August and applied for registration on 20 August. Registration was granted. On 31 July, it held inputs with ITC of ₹40,000 (invoices within one year), semi-finished goods with input ITC of ₹15,000, and a machine with ITC of ₹60,000. What credit can it take under Section 18?

Show the solution
  1. Event: new registration. The application on 20 August is within 30 days of 1 August, so Section 18(1)(a) applies.
  2. Reference day: the day immediately before the date of liability, 31 July.
  3. Covered: inputs in stock ₹40,000 and inputs in semi-finished goods ₹15,000.
  4. Capital goods are not covered under (a), so the machine's ₹60,000 is excluded.
  5. Total = 40,000 + 15,000 = ₹55,000.

Answer: Kaveri Traders can take credit of ₹55,000, subject to prescribed conditions. The ₹60,000 on the machine is not allowed.

Example 2

Mehta Foods is a composition taxpayer under section 10 and moves to regular scheme under section 9. On the day before, it holds inputs ITC ₹30,000, finished goods input ITC ₹20,000 and a machine with ITC ₹1,00,000. Assume the prescribed reduction for the machine is 10 percentage points for that period, so 90% of the ITC is allowed. Compute credit.

Show the solution
  1. Event: exit from composition, so Section 18(1)(c) applies.
  2. Inputs in stock ₹30,000 and inputs in finished goods ₹20,000 give ₹50,000 with no reduction.
  3. Capital goods are covered, but the credit is reduced by the prescribed percentage points: 1,00,000 × 90% = ₹90,000.
  4. Total = 50,000 + 90,000 = ₹1,40,000.
  5. The one-year invoice limit under 18(2) must be met for each supply.

Answer: Credit of ₹1,40,000 is allowed, on the stated assumption that the reduction is 10 percentage points and the invoices are within one year.

Exam tips

  • In MCQs, the trap is usually capital goods. Remember where they are covered and where they are not.
  • Write the section reference in each answer, such as 18(1)(c) or 18(4). It shows the examiner you know the law.
  • If the question gives a percentage reduction, use it as given. Do not substitute from memory.
  • For transfer of business, mention ITC-02, the certificate of a practising chartered accountant or cost accountant, and acceptance by the transferee.
  • Always state the reference date and the ledger used for payment.

Practice questions from Input Tax Credit

Special Cases: Capital Goods, Change in Constitution and Transitions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Special Cases: Capital Goods, Change in Constitution and Transitions: frequently asked questions

Can I take ITC on capital goods when I register newly?

No. Section 18(1)(a) and (b) cover inputs in stock and inputs in semi-finished or finished goods only. Capital goods are covered when you leave composition or when exempt supply becomes taxable, and then only with a prescribed reduction.

What happens to my credit when I opt for the composition scheme?

You pay an amount equal to the credit on inputs in stock, semi-finished and finished goods and capital goods, reduced by prescribed percentage points. You can pay it from the credit or cash ledger. The remaining credit balance then lapses.

How is credit transferred when a business is sold or merged?

You file FORM GST ITC-02 with a request to transfer unutilised credit, along with a certificate from a practising chartered accountant or cost accountant. The sale must have specific provisions for transfer of liabilities. The transferee accepts the details and the credit is added to its ledger.

How is credit split in a demerger?

Under Rule 41, the credit is apportioned in the ratio of the value of assets of the new units as set out in the demerger scheme. Value of assets means the entire assets of the business, whether or not ITC was taken on them.