Section 18 of the Central Goods and Services Tax (CGST) Act, 2017 deals with the availability of Input Tax Credit (ITC) in special circumstances. This section provides specific situations in which a registered person can claim ITC on eligible inputs, stock and capital goods even though the person has newly become liable for GST registration, has obtained voluntary registration, has shifted from the composition scheme to the regular scheme, or when an exempt supply becomes taxable.
Section 18 also explains what happens to ITC when a registered person moves in the opposite direction, such as opting for the composition scheme or when the person’s supplies become wholly exempt. It further provides rules for transferring unutilised ITC when a business is sold, merged, demerged, amalgamated, leased or otherwise transferred with a provision for transfer of liabilities.
The practical procedure for claiming ITC in these special situations is prescribed through the CGST Rules, particularly Rule 40 and Rule 41.
What is Section 18 of the CGST Act?
Section 18 is titled “Availability of credit in special circumstances.”
In simple terms, Section 18 provides special ITC provisions for situations where the tax status of a person or the taxability of a supply changes.
The major situations covered by Section 18 are:
- A person becomes liable for GST registration and obtains registration.
- A person takes voluntary registration.
- A registered person leaves the composition scheme and becomes liable to pay tax under the regular provisions.
- An exempt supply becomes taxable.
- A registered business undergoes sale, merger, demerger, amalgamation, lease or transfer.
- A registered person shifts to the composition scheme or his supplies become wholly exempt.
- Capital goods on which ITC has been claimed are subsequently supplied.
Therefore, Section 18 is closely connected with the movement of a taxpayer from one GST status to another.
Section 18(1) – ITC in Special Circumstances
Section 18(1) contains four important situations where a registered person can claim eligible ITC.
1. New Registration After Becoming Liable to Pay GST
Under Section 18(1)(a), a person who becomes liable to obtain GST registration and applies for registration within 30 days from the date on which the liability arises, and whose registration is granted, can claim ITC on eligible inputs held in stock.
The credit can also be claimed on inputs contained in:
- Semi-finished goods; and
- Finished goods,
held in stock on the day immediately preceding the date from which the person becomes liable to pay tax.
Example
Suppose a business becomes liable for GST registration from 1 July.
If the person applies for registration within the prescribed 30-day period and registration is granted, eligible ITC can be claimed on qualifying stock existing on 30 June, subject to the conditions prescribed under the law and rules.
The provision is therefore useful for a business that becomes liable for GST registration after already holding taxable business stock.
Important Point
Section 18(1)(a) specifically covers:
- Inputs in stock; and
- Inputs contained in semi-finished or finished goods.
It does not generally provide the same stock-based ITC for input services or capital goods in this situation.
2. Voluntary Registration
Section 18(1)(b) deals with a person who takes registration voluntarily under Section 25(3).
Such a person can claim ITC on eligible inputs held in stock and inputs contained in:
- Semi-finished goods; and
- Finished goods,
held on the day immediately preceding the date of grant of registration.
Example
Suppose a business is not otherwise required to obtain GST registration but decides to take voluntary registration.
If registration is granted on 15 August, eligible ITC can be claimed on qualifying stock existing on 14 August, subject to the prescribed conditions.
Again, this provision is focused on inputs and stock and does not generally allow ITC on input services or capital goods merely because the person has obtained voluntary registration.
3. Shifting from Composition Scheme to Regular GST
Section 18(1)(c) deals with a registered person who ceases to pay tax under Section 10, meaning the person moves out of the composition scheme and becomes liable to pay tax under the regular provisions of Section 9.
In this situation, the person can claim ITC on:
- Inputs held in stock;
- Inputs contained in semi-finished goods;
- Inputs contained in finished goods; and
- Capital goods,
held on the day immediately preceding the date from which the person becomes liable to pay tax under Section 9.
For capital goods, the available credit is reduced by the prescribed percentage.
Example
Suppose a trader was paying GST under the composition scheme and subsequently becomes a regular taxpayer from 1 April.
The eligible stock and capital goods held on 31 March may qualify for ITC subject to the conditions and prescribed reduction applicable to capital goods.
This provision allows the taxpayer to transition into the regular GST system with eligible credit relating to existing business assets.
4. Exempt Supply Becomes Taxable
Section 18(1)(d) applies where a supply that was previously exempt becomes taxable.
In such a situation, the registered person can claim ITC on:
- Inputs held in stock;
- Inputs contained in semi-finished goods;
- Inputs contained in finished goods,
to the extent they relate to the exempt supply that has become taxable.
ITC can also be claimed on capital goods that were exclusively used for that exempt supply.
For capital goods, the credit is reduced by the prescribed percentage.
Example
Suppose a particular product was exempt from GST but later becomes taxable.
If the business has eligible inventory relating to that product immediately before the supply becomes taxable, Section 18 may allow ITC on the qualifying stock and eligible capital goods subject to the prescribed conditions.
Comparison of Section 18(1) Situations
| Situation | Eligible ITC |
|---|---|
| New registration after becoming liable | Inputs in stock and inputs contained in semi-finished/finished goods |
| Voluntary registration | Inputs in stock and inputs contained in semi-finished/finished goods |
| Composition to regular scheme | Inputs in stock, inputs in semi-finished/finished goods and capital goods |
| Exempt supply becomes taxable | Relevant inputs in stock, inputs in semi-finished/finished goods and qualifying capital goods |
The exact amount of credit and documentation must be determined according to Section 18 and the applicable CGST Rules.
Section 18(2) – One-Year Time Limit
Section 18(2) contains an important restriction.
A registered person cannot claim ITC under Section 18(1) in respect of a supply of goods or services after the expiry of one year from the date of issue of the tax invoice relating to that supply.
This is a special time restriction for ITC claimed under Section 18(1).
Example
Suppose an eligible input was purchased under an invoice dated 10 January 2026.
If the credit is being claimed under Section 18(1), the one-year restriction under Section 18(2) needs to be considered. The invoice date is therefore important when identifying eligible stock and calculating the available credit.
This one-year rule should not be confused with the general ITC time limit under Section 16(4). Section 18 contains its own specific provision for credit claimed under Section 18(1).
Section 18(3) – Transfer of Unutilised ITC During Business Reorganisation
Section 18(3) deals with the transfer of unutilised ITC when there is a change in the constitution of a registered person because of:
- Sale of business;
- Merger;
- Demerger;
- Amalgamation;
- Lease; or
- Transfer of business,
provided there is a specific provision for transfer of liabilities.
In such cases, the unutilised ITC lying in the electronic credit ledger can be transferred to the relevant sold, merged, demerged, amalgamated, leased or transferred business in the prescribed manner.
Transfer of ITC in Business Transfer
The practical procedure is provided through Rule 41.
The registered person transferring the business has to furnish the required details electronically in FORM GST ITC-02 along with a request to transfer the unutilised ITC to the transferee.
In the case of a demerger, the ITC is apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.
The transferor is also required to provide a certificate from a practicing Chartered Accountant or Cost Accountant certifying that the sale, merger, demerger, amalgamation, lease or transfer of business includes a specific provision for transfer of liabilities.
The transferee has to accept the details furnished by the transferor on the common portal. After acceptance, the specified unutilised ITC is credited to the transferee’s electronic credit ledger.
The inputs and capital goods transferred as part of the business also have to be properly accounted for in the books of the transferee.
Example of Business Transfer
Suppose Company A has ₹8 lakh of eligible unutilised ITC in its electronic credit ledger and its business is transferred to Company B under an arrangement that also provides for transfer of liabilities.
Subject to the legal conditions and prescribed procedure, the eligible unutilised ITC can be transferred to Company B through the prescribed mechanism.
ITC Transfer in a Demerger
Demerger situations require special attention because the original business may be divided into multiple units.
Under Rule 41, the ITC is apportioned according to the ratio of the value of assets of the new units specified in the demerger scheme.
Therefore, a demerged business cannot simply divide the available ITC equally among the resulting entities.
The prescribed asset-based ratio has to be considered.
Section 18(4) – When a Regular Taxpayer Opts for Composition
Section 18(4) deals with the reverse situation.
Where a registered person who has already availed ITC:
- Opts to pay tax under Section 10; or
- Where the goods or services supplied by the person become wholly exempt,
the person is required to pay an amount corresponding to the ITC relating to:
- Inputs held in stock;
- Inputs contained in semi-finished goods;
- Inputs contained in finished goods; and
- Capital goods,
after applying the prescribed reduction in the case of capital goods.
The relevant amount is determined as on the day immediately preceding:
- The date of exercising the composition option; or
- The date on which the supplies become exempt,
as applicable.
What Happens to Remaining ITC?
Section 18(4) further provides that after payment of the required amount, the remaining balance of ITC lying in the electronic credit ledger, if any, lapses.
Example
Suppose a regular taxpayer has been claiming ITC but later opts for the composition scheme.
The taxpayer cannot simply retain all previously available ITC and continue using it after moving to composition.
The required amount relating to stock and capital goods has to be dealt with according to Section 18(4) and the applicable rules.
Section 18(5) – Manner of Calculation
Section 18(5) provides that the amount of credit available under Section 18(1) and the amount payable under Section 18(4) shall be calculated in the manner prescribed.
This means that the CGST Rules are important for the actual calculation.
For example, Rule 40 provides the procedure for claiming ITC in special circumstances, while Rule 44 provides the manner of reversal in certain special situations.
Rule 40 – Manner of Claiming ITC in Special Circumstances
Rule 40 provides the practical procedure for claiming ITC under Section 18(1).
For capital goods covered under Section 18(1)(c) and 18(1)(d), the ITC is calculated after reducing the tax paid on the capital goods by 5 percentage points for every quarter or part of a quarter from the date of the relevant invoice or prescribed document on which the capital goods were received.
This is why the full original GST amount on an older capital asset may not be available as ITC when a taxpayer becomes eligible under Section 18(1)(c) or 18(1)(d).
FORM GST ITC-01
A person claiming ITC under Section 18(1) is required to furnish the prescribed declaration electronically in FORM GST ITC-01.
Rule 40 provides that the declaration is generally required within 30 days from the date of becoming eligible to claim the credit, subject to any extension permitted by the Commissioner through notification.
The form contains details relating to:
- Inputs lying in stock;
- Inputs contained in semi-finished goods;
- Inputs contained in finished goods; and
- Capital goods, wherever applicable.
The relevant date for determining stock depends on the particular situation under Section 18(1).
Certification by Chartered Accountant or Cost Accountant
Where the aggregate value of the Section 18(1) claim on account of Central Tax, State Tax and Integrated Tax exceeds the prescribed threshold, the details furnished in the declaration are required to be certified by a practicing Chartered Accountant or Cost Accountant.
Rule 40 specifies the certification requirement for claims exceeding ₹2 lakh.
Therefore, businesses making a large ITC claim under Section 18 should pay particular attention to the documentation and certification requirements.
Verification of ITC Claim
The ITC claimed under Section 18(1)(c) and Section 18(1)(d) is subject to verification with the corresponding details furnished by the supplier through the prescribed return mechanism. Rule 40 contains the relevant verification requirement.
This makes proper supplier invoices and matching records important when claiming special-circumstance ITC.
Section 18(6) – Sale of Capital Goods
Section 18(6) deals with the situation where capital goods or plant and machinery on which ITC has been taken are supplied.
In such a case, the registered person has to pay an amount equal to:
ITC taken on the capital goods or plant and machinery reduced by the prescribed percentage points
or
Tax on the transaction value of the capital goods or plant and machinery under Section 15
whichever is higher.
Simple Example
Suppose a business purchased a machine and claimed ITC.
Later, the machine is sold.
The taxpayer cannot simply calculate GST on the sale price and ignore the ITC that was originally taken. Section 18(6) requires comparison of the prescribed reduced ITC amount with the GST calculated on the transaction value, and the higher amount becomes relevant.
Special Rule for Refractory Bricks, Moulds, Dies, Jigs and Fixtures
Section 18(6) contains a specific proviso for certain items supplied as scrap.
Where:
- Refractory bricks;
- Moulds;
- Dies;
- Jigs; or
- Fixtures
are supplied as scrap, the taxable person may pay tax on the transaction value determined under Section 15.
This is a specific exception within the capital-goods provision.
Section 18 and Composition Scheme
Section 18 works in both directions when a taxpayer moves between the regular GST system and the composition scheme.
Composition to Regular Scheme
When a person ceases to pay tax under Section 10 and becomes liable under Section 9:
- Eligible stock ITC can become available.
- ITC on eligible capital goods can also become available.
- Capital-goods credit is subject to the prescribed reduction.
Regular Scheme to Composition
When a regular taxpayer opts for Section 10:
- ITC relating to eligible stock and capital goods has to be dealt with under Section 18(4).
- The prescribed amount has to be paid by debit to the electronic credit ledger or electronic cash ledger.
- Any remaining ITC balance after the required payment lapses.
Section 18 and Exempt Supplies
Section 18 also deals with a change in the taxability of a supply.
When Exempt Supply Becomes Taxable
Eligible ITC can become available on:
- Inputs in stock;
- Inputs contained in semi-finished goods;
- Inputs contained in finished goods; and
- Qualifying capital goods exclusively used for the previously exempt supply.
This is covered under Section 18(1)(d).
When Taxable Supplies Become Wholly Exempt
The reverse treatment applies under Section 18(4).
The taxpayer has to account for the prescribed amount of ITC relating to stock and capital goods, and the remaining ITC balance lapses after the required payment.
Section 18 vs Section 16
Section 16 and Section 18 both deal with ITC, but they serve different purposes.
| Section 16 | Section 18 |
|---|---|
| Provides general eligibility and conditions for ITC | Provides ITC in specified special circumstances |
| Applies to normal ITC claims | Applies to changes in registration, taxability or business status |
| Covers conditions such as invoice, receipt and tax payment | Covers new registration, voluntary registration, composition-to-regular transition and exempt-to-taxable supplies |
| Contains the general ITC time limit | Contains a specific one-year restriction for ITC under Section 18(1) |
| General ITC framework | Special ITC framework |
Therefore, Section 18 should not be read in isolation. The general eligibility requirements and restrictions under the CGST Act continue to be relevant.
Section 18 vs Section 17
Section 17 deals with apportionment and blocked credits, while Section 18 deals with special circumstances in which ITC becomes available or has to be reversed/paid back.
For example:
- Section 17 may restrict common ITC used for taxable and exempt supplies.
- Section 18 may allow eligible ITC when an exempt supply becomes taxable.
- Section 17(5) can block specified categories of ITC.
- Section 18 provides special credit treatment when a taxpayer changes from composition to regular taxation.
Therefore, a credit available under Section 18 must still satisfy the applicable restrictions under the GST law.
Section 18 – Practical Examples
Example 1: New GST Registration
A business becomes liable for GST registration on 1 October and applies for registration within the prescribed period.
It has eligible inputs and finished goods containing eligible inputs in stock on 30 September.
Subject to the conditions of Section 18 and Rule 40, the taxpayer may claim the eligible ITC relating to that stock.
Example 2: Voluntary Registration
A small business voluntarily obtains GST registration on 20 October.
Eligible inputs are lying in stock on 19 October.
The person may claim eligible ITC on such inputs under Section 18(1)(b), subject to the prescribed conditions.
Example 3: Composition to Regular
A trader was paying tax under the composition scheme but becomes a regular taxpayer from 1 April.
Eligible stock and capital goods are held on 31 March.
Section 18(1)(c) may allow eligible ITC, with the prescribed reduction applicable to capital goods.
Example 4: Exempt Product Becomes Taxable
A business manufactures a product that was previously exempt.
The product becomes taxable from a specified date.
The business has eligible stock immediately before the change.
Section 18(1)(d) can allow eligible ITC relating to that stock and qualifying capital goods exclusively used for the supply, subject to the prescribed conditions.
Example 5: Regular Taxpayer Opts for Composition
A regular taxpayer has ITC and subsequently opts for the composition scheme.
The taxpayer must determine the amount payable under Section 18(4) in respect of eligible stock and capital goods.
After the required payment, any remaining ITC balance lapses.
Important Documents for Section 18 ITC
A taxpayer claiming ITC under Section 18 should maintain proper records such as:
- Tax invoices;
- Debit notes, where applicable;
- Stock records;
- Details of semi-finished and finished goods;
- Capital-goods records;
- Registration details;
- Date of becoming liable for registration;
- Date of grant of registration;
- Composition-to-regular transition details;
- Details of exempt supplies becoming taxable;
- Supplier-reported details; and
- FORM GST ITC-01 and other prescribed forms, wherever applicable.
Proper documentation is important because the eligibility of credit depends on the specific circumstances and statutory conditions.
Key Points of Section 18 of CGST Act
Section 18 can be remembered through the following points:
- Section 18(1)(a): ITC on eligible stock for a person obtaining registration after becoming liable to register, subject to conditions.
- Section 18(1)(b): ITC on eligible stock for a person taking voluntary registration.
- Section 18(1)(c): ITC on eligible stock and capital goods when a person moves from composition to regular taxation.
- Section 18(1)(d): ITC when an exempt supply becomes taxable.
- Section 18(2): ITC under Section 18(1) cannot be taken after one year from the date of the relevant tax invoice.
- Section 18(3): Allows transfer of unutilised ITC in specified business reorganisations.
- Section 18(4): Requires payment/reversal of prescribed ITC when a regular taxpayer opts for composition or supplies become wholly exempt.
- Section 18(5): Provides that the calculation is to be made in the prescribed manner.
- Section 18(6): Provides the tax/ITC treatment when capital goods or plant and machinery on which ITC was taken are supplied.
- Rule 40: Provides the procedure for claiming ITC in special circumstances.
- Rule 41: Provides the procedure for transfer of ITC in business reorganisation.
Conclusion
Section 18 of the CGST Act provides an important mechanism for dealing with Input Tax Credit when the GST status or taxability of a business changes. It allows eligible ITC in situations such as new registration, voluntary registration, movement from the composition scheme to regular taxation and conversion of exempt supplies into taxable supplies.
At the same time, Section 18 also ensures that ITC is appropriately reversed or accounted for when a regular taxpayer enters the composition scheme, supplies become wholly exempt or capital goods on which ITC was claimed are subsequently supplied.
For practical compliance, Section 18 should be read together with the relevant provisions of Section 16, Section 17 and the CGST Rules, particularly Rules 40 and 41. The taxpayer should also maintain proper invoices, stock records and supporting documents because the amount and timing of credit depend on the specific circumstances.
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