Goods and Services Tax (GST) and Corporate Tax Planning · Input Tax Credit and Computation of GST Liability

ITC Special Cases: Transitions, Transfers and ISD Credit

Updated 11 October 2026 · Fact-checked

Special-case ITC deals with credit when your status changes. Under section 18, a newly registered person gets credit on inputs in stock and in semi-finished or finished goods. Capital goods give entry credit only under section 18(1)(c) and (d). Payment is due on entering composition, becoming wholly exempt or cancellation. Section 20 governs ISD distribution.

Understand Special Cases: Transitions, Transfers and Distribution of Credit

Normal ITC follows a purchase. Special-case ITC follows a change in your status. Section 18 deals with the moment you move into or out of the tax net, or from one tax status to another. The idea is simple: credit should match the goods you hold on the day your status changes.

There are two directions. Entry cases give you credit: new registration, voluntary registration, leaving composition, or an exempt supply turning taxable. A newly registered person gets credit on inputs only. Capital goods feature in entry credit only under s.18(1)(c) (leaving composition) and s.18(1)(d) (an exempt supply becoming taxable). Exit cases take credit away: opting for composition, or your supplies becoming wholly exempt. In exit cases you pay an amount equal to the credit on inputs in stock, inputs contained in semi-finished or finished goods, and capital goods, reduced by prescribed percentage points. Capital goods also feature in payment obligations under s.18(6), when you supply capital goods on which credit was taken, and under s.29(5), on cancellation.

Section 18(3) handles change in constitution. If a business is sold, merged, demerged, amalgamated, leased or transferred with specific provisions for transfer of liabilities, the unused credit in the electronic credit ledger can be transferred to the new business, in the prescribed manner.

Section 20 handles shared input services (not goods). As substituted with effect from 1 April 2025, an office that receives tax invoices for input services for or on behalf of distinct persons (the distinct persons referred to in section 25) shall be required to be registered as an Input Service Distributor (ISD) and shall distribute the credit of those invoices. What is distributed is the credit of central tax or integrated tax. Central tax credit goes out as central tax or integrated tax, and integrated tax credit goes out as integrated tax or central tax. The credit is passed on by a document in the prescribed manner, within the prescribed time and subject to prescribed conditions.

Section 29(5) completes the picture. When registration is cancelled, you pay an amount equal to the credit on inputs held in stock, inputs contained in semi-finished or finished goods held in stock, and capital goods or plant and machinery, on the day immediately preceding the date of cancellation, or the output tax payable on such goods, whichever is higher.

Key rules to remember

Entry credit: new registration (s.18(1)(a)): Credit on inputs in stock + inputs in semi-finished/finished goods, as on the day before liability to pay tax begins; Condition: applied for registration within 30 days of becoming liable. Subject to prescribed conditions. No credit on capital goods under this clause.
Entry credit: leaving composition (s.18(1)(c)): Credit on inputs in stock + semi-finished/finished goods + capital goods, on the day before liability under section 9 begins; Credit on capital goods is reduced by prescribed percentage points.
Exempt turns taxable (s.18(1)(d)): Credit on stock relatable to the exempt supply + capital goods used exclusively for it; Capital goods credit reduced by prescribed percentage points.
Time limit (s.18(2)): No credit if more than 1 year has passed from date of tax invoice; Applies to credit claimed under s.18(1).
Exit reversal (s.18(4)): Pay credit on stock + semi-finished/finished goods + capital goods (reduced by prescribed percentage points), on the day before the option or exemption; Pay by debit to the electronic credit ledger or electronic cash ledger. After payment, any balance of credit lying in the electronic credit ledger lapses.
Sale of capital goods (s.18(6)): Pay the higher of: (ITC taken − prescribed percentage points) or tax on transaction value under s.15; Scrap of refractory bricks, moulds, dies, jigs and fixtures: tax on transaction value may be paid.
Cancellation (s.29(5)): Pay the higher of: (a) ITC on inputs held in stock, inputs contained in semi-finished or finished goods held in stock, and capital goods or plant and machinery, on the day immediately preceding the date of cancellation, or (b) the output tax payable on such goods; For capital goods or plant and machinery, the proviso says pay the higher of the ITC taken reduced by prescribed percentage points, or the tax on the transaction value under section 15.
Capital goods reduction (as prescribed): Reduction = percentage points prescribed under the CGST Rules; The Act says only 'such percentage points as may be prescribed'. It gives no figure. If a question states a rate, such as 5 percentage points per quarter, use it as given and say it is the rate supplied by the question. Do not quote it as a number in the Act.
ISD distribution (s.20): Credit of central or integrated tax on input service invoices, distributed by a prescribed document; Applies to input services only. Central tax goes out as central or integrated tax; integrated tax goes out as integrated or central tax. Manner, time and conditions are as prescribed.

How to solve Special Cases: Transitions, Transfers and Distribution of Credit questions

Identify the trigger first. The trigger decides whether you claim credit, reverse credit or transfer it.

1Name the event: registration, voluntary registration, leaving composition, exempt becoming taxable, opting for composition, becoming wholly exempt, change in constitution, cancellation, or shared services.
2Decide the direction: entry gives credit, exit needs payment, constitution change transfers the ledger balance.
3Fix the date: use the day immediately preceding the date of the event, as the section says.
4List the eligible items: inputs in stock, inputs in semi-finished and finished goods, and capital goods only where the clause includes them.
5Check conditions: the 30-day registration application, the one-year invoice limit, and the requirement of specific transfer of liabilities.
6Compute using the prescribed method. Reduce capital goods credit by the prescribed percentage points.
7For exit or cancellation, compare with output tax where the section says whichever is higher. Check what happens to the remaining ledger balance.
8Conclude with the section number, the amount and the compliance step, such as the ledger debit or the transfer form.

Quickest way: Trigger, direction, items, date

When to use it: Use for short problems where you must state the section and the outcome quickly.

Write the trigger and map it to a clause: 18(1)(a), (b), (c), (d), 18(3), 18(4), 18(6), 20 or 29(5).
Write one line: credit allowed, payment required, or transfer allowed.
Pick items. For entry credit, capital goods are included only in 18(1)(c) and (d). For payment, capital goods feature in 18(4), 18(6) and 29(5).
Apply the one-year and 30-day tests where relevant.
Do the arithmetic and state the final figure or conclusion.

Common mistakes in Special Cases: Transitions, Transfers and Distribution of Credit

Allowing credit on capital goods to a newly registered person under s.18(1)(a).
Students mix clause (a) with clause (c).
Fix: Clause (a) covers only inputs in stock and in semi-finished or finished goods. Capital goods are in clauses (c) and (d).
Ignoring the 30-day condition for a new registrant.
Students focus on the stock and forget the condition.
Fix: Check that registration was applied for within thirty days of becoming liable.
Using the wrong date for stock.
Students use the date of registration or the date of the option.
Fix: Use the day immediately preceding the relevant date, as each clause states.
Letting the balance credit stay after opting for composition.
Students forget the proviso to s.18(4).
Fix: After paying the amount, the balance of credit lying in the electronic credit ledger lapses.
Treating ISD as optional for shared service invoices, or applying it to goods.
Older practice allowed other methods of passing on credit, and students assume ISD covers all purchases.
Fix: Under the substituted s.20, an office receiving tax invoices for input services for or on behalf of distinct persons shall be required to be registered as ISD. It covers input services only, and it distributes central or integrated tax credit by a prescribed document.
Transferring credit on a sale of business without a transfer of liabilities.
Students read s.18(3) as covering any transfer.
Fix: The transfer requires specific provisions for transfer of liabilities, and the credit must be unutilised in the electronic credit ledger.

Worked examples

Example 1

Asha Traders Pvt Ltd crossed the registration threshold on 1 July and applied for registration on 20 July, within 30 days. It was granted registration. On 30 June it held inputs worth ₹4,00,000 with GST of ₹72,000 (all invoices under one year old) and a machine with GST of ₹50,000. Compute the credit under section 18.

Show the solution

Trigger: new registration, so s.18(1)(a) applies.
Condition: application within thirty days of becoming liable to registration is met.
Date: the day immediately preceding the date liability to pay tax begins, here 30 June.
Eligible items: inputs in stock and inputs in semi-finished or finished goods. Capital goods are not covered by clause (a).
Invoice age is under one year, so s.18(2) does not bar it.
Credit = ₹72,000. The machine's ₹50,000 is excluded.

Answer: Asha Traders can take credit of ₹72,000, subject to prescribed conditions. No credit on the machine.

Example 2

Bharat Foods Ltd, a registered person with ITC, opts to pay tax under section 10 (composition) from 1 April. On 31 March the ITC on stock is ₹60,000 and on a capital good it is ₹1,00,000. The capital good was bought 2 years and 3 months ago. The question tells you to assume: (i) the capital goods credit is reduced by 5 percentage points for each quarter or part of a quarter since the invoice, so 2 years 3 months (27 months) counts as 9 quarters; and (ii) the whole payment is made by debit to the electronic credit ledger. The credit ledger balance is ₹2,00,000. Find the amount payable and the effect on the balance.

Show the solution

Trigger: opting for composition, so s.18(4) applies.
Date: 31 March, the day before the option.
Stock: full ITC of ₹60,000 is payable.
Capital good: the Act says only that the credit is reduced by prescribed percentage points. Using the rate given in the question, the reduction is 5 × 9 = 45 percentage points. Payable = ₹1,00,000 × (100 − 45)% = ₹55,000.
Total payable = ₹60,000 + ₹55,000 = ₹1,15,000.
As assumed, the payment is made entirely by debit to the electronic credit ledger. Balance = ₹2,00,000 − ₹1,15,000 = ₹85,000.
Under the proviso to s.18(4), the balance of credit lying in the electronic credit ledger after payment lapses, so ₹85,000 lapses.
If the ₹1,15,000 were instead paid from the electronic cash ledger, the whole ₹2,00,000 in the credit ledger would lapse.

Answer: Payable is ₹1,15,000. On the stated assumptions (rate supplied by the question, payment wholly from the credit ledger), the remaining credit of ₹85,000 lapses under the proviso to s.18(4).

Exam tips

Write the section and clause number at the start of each answer. Examiners reward clear provision, analysis, conclusion.
Always separate entry cases from exit cases. A table-like list in bullet form helps you stay organised.
For percentage reductions, say they are as prescribed in the rules, then apply them if the question gives the rate.
In the open-book style, quote the key phrase of the section, such as the day immediately preceding, and then apply the facts.
For ISD questions, state who must register, what is distributed and that the credit goes out by a prescribed document.

Practice questions from Input Tax Credit and Computation of GST Liability

Special Cases: Transitions, Transfers and Distribution of Credit 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: Transitions, Transfers and Distribution of Credit: frequently asked questions

What is the difference between s.18(1)(a) and s.18(1)(c)?

Clause (a) is for a person who has newly registered within thirty days of becoming liable. It covers only inputs in stock and in semi-finished or finished goods. Clause (c) is for a person leaving composition and also covers capital goods, with a reduction.

Is ISD registration compulsory?

Under section 20 as substituted from 1 April 2025, an office that receives tax invoices for input services for or on behalf of distinct persons shall be required to be registered as an ISD and distribute the credit. It applies to input services only, not goods. The credit distributed is central tax or integrated tax, passed on by a document in the prescribed manner.

Can unused ITC be transferred when a business is sold?

Yes, under s.18(3), if there is a sale, merger, demerger, amalgamation, lease or transfer with specific provisions for transfer of liabilities. The transfer is of unutilised credit in the electronic credit ledger, in the prescribed manner.

What happens to ITC when registration is cancelled?

Under s.29(5), you pay an amount equal to the ITC on stock and capital goods, or the output tax on them, whichever is higher. Cancellation does not remove liability for earlier periods.