Chapter V - Input tax credit
Section 18
Section 18: ITC in special circumstances
Section 18 deals with input tax credit when GST status changes: new registration, voluntary registration, exit from composition, an exempt supply becoming taxable, business transfer, or a move into composition or exemption.
On this page
Need advice on Section 18?
This article is for general information. Refer to the Central Goods and Services Tax Act, 2017 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Subject to such conditions and restrictions as may be prescribed— (a) a person who has applied for registration under this Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act; (b) a person who takes registration under sub-section (3) of section 25 shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration; (c) where any registered person ceases to pay tax under section 10, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9: Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed; (d) where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable: Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed.
(2) A registered person shall not be entitled to take input tax credit under sub-section (1) in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply.
(3) Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.
(4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption: Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.
(5) The amount of credit under sub-section (1) and the amount payable under sub-section (4) shall be calculated in such manner as may be prescribed.
(6) In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher: Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.
Introduction
The qualifying stock date changes with the event. The section also imposes a one-year invoice limit for credit under subsection (1), permits transfer of unused credit on specified business reorganisations, and requires credit adjustment when a taxpayer moves into composition or supplies become wholly exempt.
Key takeaways
Identify the trigger and stock date
Subsection (1) has different qualifying dates for registration, voluntary registration, exit from composition and a supply becoming taxable.
Special credit has an invoice limit
Subsection (2) bars credit under subsection (1) after one year from the tax invoice date.
Business transfers can carry unused credit
A sale, merger, demerger, amalgamation, lease or transfer can carry unused electronic-ledger credit where the business transfer provides for liabilities, subject to prescribed procedure.
Composition or full exemption reverses credit
Subsection (4) requires the prescribed credit amount on stock and capital goods to be paid when an ITC claimant enters composition or its supplies become wholly exempt; any remaining ledger balance lapses.
Credit when tax status starts or changes
For timely registration after becoming liable, look at inputs held immediately before the liability date. For voluntary registration, use stock immediately before the grant of registration. On leaving composition, include eligible inputs and capital goods held immediately before ordinary section 9 liability starts; an exempt supply becoming taxable has its own comparable stock test.
Deadline and supporting evidence
Check each invoice's date against subsection (2)'s one-year limit for subsection (1) claims. Preserve stock records, invoices, the relevant registration or tax-status order and the event date. The Act leaves calculation and conditions to the Rules, so the current prescribed procedure must be checked.
Business reorganisation
For a sale, merger, demerger, amalgamation, lease or business transfer, subsection (3) allows unused credit to transfer when liabilities transfer under the arrangement. Check both the legal transfer document and the prescribed electronic procedure.
Exit from ITC and capital-goods disposal
Entering composition or becoming wholly exempt triggers subsection (4)'s credit repayment and lapse rule. For later supply of capital goods or plant and machinery on which ITC was taken, subsection (6) compares reduced ITC with tax on transaction value and generally requires the higher amount, with a specific scrap proviso for listed items.
Practical checklist
Do
- Map the exact section 18 event and preceding-day stock position.
- Check invoice age before a subsection (1) claim.
- Reconcile unused ledger credit and transferred liabilities in a business reorganisation.
- Apply the current Rules for the computation and electronic forms.
Avoid
- Use one stock date for every registration or status-change event.
- Assume unused credit survives a switch to composition or full exemption.
- Claim a prescribed capital-goods percentage without checking the current Rule.
Frequently asked questions
Can an eligible taxpayer claim credit on stock after leaving composition?
Section 18(1)(c) permits credit on eligible inputs and capital goods held immediately before ordinary liability begins, subject to conditions and the prescribed capital-goods reduction.
Does section 18 automatically transfer ITC in every sale of business?
No. Subsection (3) requires a qualifying transfer with specific provision for transfer of liabilities, and the prescribed procedure applies.
Need help applying this provision to your situation?
Contact BizeneedLast updated 10 October 2026