In-Depth Analysis of Input Tax Credit under the GST Act: Section 18 – Availability of Credit in Special Circumstances
Section 18 of the GST Act governs the availability of Input Tax Credit (ITC) in specific circumstances where a person’s registration or supply status changes. A person newly liable for GST registration or opting for voluntary registration can claim ITC on inputs held in stock, including those in semi-finished or finished goods, as of the day before registration. Similarly, if a registered person transitions from making exempt supplies to taxable ones, or switches from the composition scheme to the normal scheme, they can claim ITC on inputs in stock, semi-finished/finished goods, and even capital goods (subject to a prescribed percentage reduction) held on the day immediately preceding the status change. A strict 30-day time limit from the date of becoming eligible applies for claiming this credit, which can be extended by the Commissioner. When capital goods on which ITC was claimed are later supplied, the taxpayer must pay the higher of the ITC amount reduced by a prescribed percentage or the tax on the transaction value. In cases of business transfer (e.g., sale, merger), unutilized ITC in the electronic credit ledger may be transferred to the new entity under specific conditions. Importantly, the general ITC eligibility conditions (Section 16) and apportionment/blocked credit rules (Section 17) apply to claims made under Section 18, ensuring consistent ITC treatment across all scenarios.
Sub-section (1): Eligibility to Claim ITC in Special Cases
A registered person shall be entitled to take input tax credit in the following cases:
Clause (a): New Registration
When a person becomes liable to register under GST and obtains registration, they can claim ITC on inputs held in stock, inputs contained in semi-finished or finished goods, held on the day immediately before the date of registration.
Clause (b): Voluntary Registration
When a person voluntarily takes registration (though not liable), they can claim ITC on:
√ Inputs held in stock,
√ Inputs contained in semi-finished and finished goods, as on the day immediately before the date of registration.
Clause (c): Exempt to Taxable Supply
When a registered person ceases to make exempt supplies and starts making taxable supplies, they can claim ITC on:
√ Inputs held in stock,
√ Inputs in semi-finished or finished goods,
√ Capital goods (reduced by prescribed percentage), as on the day immediately before the date of change.
Clause (d): Composition to Regular Taxpayer
When a person switches from the composition scheme under Section 10 to the normal scheme, they can claim ITC on:
√ Inputs in stock,
√ Inputs in semi-finished or finished goods,
√ Capital goods (reduced by prescribed percentage), held on the day immediately before the switch.
Sub-section (2): Time Limit to Claim Credit
The input tax credit under sub-section (1) can be claimed within 30 days from the date of becoming eligible, or within a further period as extended by the Commissioner.
Note: This time frame is strict and non-compliance results in loss of entitlement to claim ITC under this section.
Sub-section (3): Conditions for Capital Goods
If a registered person has claimed ITC on capital goods under sub-section (1), and such capital goods are later supplied, the person must pay tax on such supply as per Section 18(6).
Sub-section (4): Apportionment and Blocked Credits
The provisions of:
√ Section 16 (Eligibility and Conditions), and
√ Section 17 (Apportionment and Blocked Credits) shall apply mutatis mutandis to the claims made under this section.
This ensures consistency in ITC treatment, even in special cases.
Sub-section (5): ITC on Transfer of Business
In case of transfer of business, including:
√ Sale,
√ Merger,
√ Demerger,
√ Amalgamation,
√ Lease, or
√ Transfer of ownership,
The unutilized ITC in the electronic credit ledger may be transferred to the new entity, provided:
√ There is a specific provision in the scheme of arrangement, and
√ The transferor has furnished all required details.
Such transfer is subject to prescribed conditions.
Sub-section (6): Supply of Capital Goods or Plant and Machinery
When a registered person supplies capital goods or plant and machinery, on which ITC was claimed, they must pay an amount equal to:
√ ITC taken on the said asset reduced by the prescribed percentage,
or
√ The tax on transaction value (whichever is higher),
as per Section 15 of the Act.
This ensures the government recovers ITC when such assets are sold.
Summary Table: Key Situations under Section 18
| Clause | Situation | Eligible ITC On | Cut-off Date |
| 18(1)(a) | Liable to register and registered | Inputs & stock | Day before registration |
| 18(1)(b) | Voluntary registration | Inputs & stock | Day before registration |
| 18(1)(c) | Exempt to taxable | Inputs, stock, capital goods | Day before exemption ends |
| 18(1)(d) | Composition to normal | Inputs, stock, capital goods | Day before switch |
Important Notes:
√ ITC on capital goods is subject to reduction by prescribed percentage (for wear and tear).
√ If the above time limits or conditions are not followed, the credit is forfeited.
√ The section ensures seamless credit flow during transitions in a taxpayer’s status.
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