# Special Cases Leading to Reversal of Credit [Section 18]
When a taxpayer's status moves from an ITC-eligible position to a non-ITC position, the credit attributable to existing stock must be reversed (paid back). Section 18(4) and 18(6) cover four such scenarios.
## The Four Reversal Triggers
| # | Trigger Event | What to Reverse | Reversal Date Reference |
|---|---|---|---|
| 1 | Regular supplier → Composition supplier | ITC on Inputs (RM/SFG/FG) + Capital Goods | Day immediately preceding switch-over |
| 2 | Taxable supplies → Exempt supplies | ITC on Inputs (RM/SFG/FG) + Capital Goods | Day immediately preceding date taxable became exempt |
| 3 | Cancellation of Registration | ITC on Inputs (RM/SFG/FG) + Capital Goods | Day immediately preceding date of cancellation |
| 4 | Supply (sale) of Capital Goods on which ITC was taken | Higher of: (a) ITC less 5%/qtr (b) Tax on transaction value | — |
## How to Quantify the Reversal
### A. For Inputs (RM / SFG / FG)
| Situation | Method |
|---|---|
| Invoice available | Proportionate reversal based on invoice value |
| Invoice NOT available | Reversal based on prevailing market price as on relevant date — certified by practicing CA/CMA |
### B. For Capital Goods
- Useful life is statutorily fixed at 5 years = 60 months.
- Reverse ITC for the remaining useful life in full months.
- Formula:
$$\text{Reversal} = \frac{\text{Total ITC} \times \text{Remaining months}}{60}$$
- The reversed amount is added to output tax liability.
### C. For Sale of Capital Goods [Section 18(6)]
Amount payable = Higher of:
1. Total ITC – (5% per quarter or part quarter from invoice date), OR
2. Tax on transaction value of sale
> Exception: For refractory bricks, jigs, moulds, dies, tools, fixtures — pay tax on transaction value directly (no comparison needed).
## Balance Treatment Rule
| Scenario | Treatment |
|---|---|
| ITC balance > reversal required | Excess credit lapses (cannot be claimed/refunded) |
| ITC balance < reversal required | Shortfall added to output tax liability (pay in cash) |