Think of Section 18 as the GST rulebook for ITC in unusual life events — what happens when your business changes status, switches tax regimes, or restructures. Normal ITC rules cover day-to-day purchases; Section 18 covers the edge cases that examiners love.
Four situations where you suddenly get ITC you didn't have before (Section 18(1)):
- (a) Fresh registration (mandatory): Rajesh starts a business, crosses the GST threshold, and registers within 30 days. He gets ITC on all stock and WIP/finished goods he held the day before his tax liability began. Capital goods? Not covered here.
- (b) Voluntary registration: Ms. Iyer voluntarily registers under Section 25(3) even though she's below the threshold. She gets ITC on stock and WIP/finished goods held the day before her registration is granted. Again, no capital goods ITC here.
- (c) Switching from Composition to Regular: A composition dealer (who pays a flat % and gets no ITC) opts out and moves to the regular scheme. From the day before he becomes liable under Section 9, he can claim ITC on stocks, WIP, finished goods, and capital goods — but capital goods credit is reduced by a prescribed percentage for each quarter of use.
- (d) Exempt supply becomes taxable: Mr. Sharma was supplying an exempt product. The government now makes it taxable. He can claim ITC on related stocks, WIP, and capital goods held the day before the supply becomes taxable. Capital goods again get the percentage reduction.
Three more critical rules to memorise:
- Section 18(2) — 1-year cap: You cannot claim ITC under sub-section (1) if the tax invoice is more than one year old at the time you're claiming.
- Section 18(3) — Business restructuring: In a merger, demerger, amalgamation, or business transfer, the unutilised ITC in the electronic credit ledger can be transferred to the new/acquiring entity, provided liabilities are also specifically transferred.
- Section 18(4) — Reversal (the flip side): If you previously had ITC and now opt for composition OR your supplies become wholly exempt, you must reverse ITC on closing stock, WIP, and capital goods (with prescribed reduction). Any leftover ITC after reversal in the credit ledger lapses — it's gone.
- Section 18(6) — Selling capital goods: If you sell capital goods on which you claimed ITC, you must pay back the higher of: (i) ITC taken minus prescribed reduction, or (ii) GST on the transaction value of that asset.
📊 Worked example
Example 1 — Reversal when switching to Composition (Section 18(4))
Sunita Traders (regular taxpayer) opts into the composition scheme from 1 April 2026.
On 31 March 2026 (day before switch), they hold:
- Closing stock (inputs): ₹2,00,000
- WIP: ₹50,000
- Capital goods (machine bought 6 months ago, ITC claimed = ₹36,000, prescribed reduction = 5% per quarter = 2 quarters = 10%)
Working:
- ITC to reverse on stock: ₹2,00,000 × 18% GST rate = ₹36,000
- ITC to reverse on WIP: ₹50,000 × 18% = ₹9,000
- ITC to reverse on capital goods: ₹36,000 − (₹36,000 × 10%) = ₹36,000 − ₹3,600 = ₹32,400
- Total reversal = ₹36,000 + ₹9,000 + ₹32,400 = ₹77,400
- This is debited from electronic credit ledger (or cash ledger). Any remaining ITC after this lapses.
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Example 2 — Selling a capital good (Section 18(6))
Rajesh & Co. Pvt. Ltd. purchased machinery for ₹10,00,000 and claimed ITC of ₹1,80,000 (GST @18%). After 3 quarters, they sell the machine for ₹7,00,000.
Prescribed reduction: 5% per quarter × 3 quarters = 15%
Working:
- Option (i): ITC taken − reduction = ₹1,80,000 − (15% × ₹1,80,000) = ₹1,80,000 − ₹27,000 = ₹1,53,000
- Option (ii): GST on sale value = ₹7,00,000 × 18% = ₹1,26,000
- Pay the higher = ₹1,53,000 (debit to electronic credit or cash ledger)
⚠️ Common exam mistakes
- Confusing the four situations in 18(1): Students mix up which situations allow capital goods ITC. Remember — only situations (c) and (d) include capital goods. Situations (a) and (b) cover only inputs and semi-finished/finished goods.
- Getting the 'day immediately preceding' wrong: ITC is taken on stock held the day before the triggering event (liability date, registration date, etc.), not on the event date itself. The exam loves testing this 'one day before' rule.
- Forgetting the 1-year invoice cap in 18(2): Even in these special circumstances, if the tax invoice is older than one year, the ITC is simply unavailable. Students often assume 18(1) overrides all time limits — it doesn't.
- Treating 18(3) as automatic: ITC transfer on business restructuring is not automatic. It must be done 'in such manner as may be prescribed' and requires that liabilities are specifically transferred too. Don't write in exams that ITC just 'passes on' in a merger.
- Ignoring the 'higher of' rule in 18(6): When selling capital goods, students often calculate only the reduced ITC amount and stop there. You must also calculate GST on transaction value and pay whichever is higher. Picking the lower amount is a guaranteed mark loss.
📖 Bare Act text — Section 18, CGST Act 2017
(click to expand)
(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.
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