Section 18 of the CGST Act, 2017 (Part I) - Availment and Transfer of ITC in Special Circumstances

Opening Perspective - When Section 18 Overrides Section 16: The Special Context of Credit Entitlement

Generally, a registered person's entitlement is quite clear under normal circumstances. To avail input tax credit (ITC), one follows the straightforward provisions of Section 16, along with the conditions outlined in Section 17 of the CGST Act, 2017. These rules form the core of the GST credit system: they permit a credit for tax paid on inputs, input services, and capital goods used for business purposes or for further activities, while ensuring proper reversals when used for non-business or exempt purposes. Essentially, Sections 16 and 17 establish a stable process - one in which credit flows smoothly through the typical supply-and-consumption cycle.

The GST law also understands that business circumstances are always changing. Companies might move from being unregistered to registered, switch from composition to regular levy, or go from exempt to taxable supplies. In these situations, deciding whether they can claim ITC isn't straightforward based only on Section 16, because the taxpayer is in a transitional phase-shifting from a time when credit was limited or not available to a new stage where it should be properly recognized. To help handle these special cases, the law includes a specific rule in Section 18, which explains how ITC can be claimed, transferred, or reversed under certain circumstances.

Whenever a taxpayer reaches one of these key turning points, the right to claim a credit is guided by Section 18, along with the related procedural rules. Think of Section 18 as a helpful bridge - it makes sure that credits aren't lost when liability starts, and also that they don't unfairly stay when eligibility ends. This way, it balances fairness with fiscal responsibility by setting specific conditions, calculation methods, and time limits that work alongside the usual rules.

This article offers a friendly exploration of these special cases. In Part I, we look at when credit starts - including new registration, voluntary registration, stopping from where they left off, or turning exempt supplies into taxable ones. Part II will then shift focus to the other important side - how credit might need to be transferred, adjusted, or reversed to ensure the system remains fair and works smoothly.

Section 18 of the CGST Act sets out a clear and balanced approach to handling input tax credits (ITC) during critical transitions-such as when a person needs to register, chooses to leave the composition scheme, or undergoes business changes such as mergers or demergers. Consider it a fair system that awards credit for taxable supplies and requires repayment when supplies become exempt or non-creditable. This approach helps keep the process smooth and fair for everyone involved. The details are based on Rules 40, 41, 41A, 44, and 44A of the CGST Rules, 2017.

1. AVAILING ITC WHEN CIRCUMSTANCES CHANGE - SECTION 18(1)

(a) Registration after Becoming Liable (Applied within 30 Days and Granted)

When someone needs to register under GST, they should apply within thirty days, and once their registration is approved, they can enjoy the benefit of claiming ITC on inputs they have in stock, as well as on inputs in semi-finished or finished goods just before the date they become liable to pay tax. It's important to note that this benefit applies only to inputs, not to input services or capital goods.

The registered person should file Form GST ITC-01 within 30 days of becoming eligible, sharing the details of such inputs. If the total claim across all tax heads exceeds Rs 2,00,000, a CA/CMA certification is required.

(b) Voluntary Registration (Section 25(3))

A person who registers voluntarily under Section 25(3) has the opportunity to claim ITC on inputs stored in their inventory, as well as inputs used in semi-finished or finished goods from the day before registration. Please note, this does not apply to input services or capital goods. To do so, the declaration must be submitted via Form GST ITC-01 within 30 days, following the certification requirements mentioned earlier.

(c) Moving from Composition to the Regular Scheme

When a registered person ceases to pay tax under the composition levy and becomes When they are liable to pay tax under the regular scheme, they also become eligible to claim ITC. respect of inputs, inputs contained in semi-finished or finished goods, and also on capital goods, as on the day immediately preceding the date from which they become liable to pay tax under Section 9.

In the case of capital goods, Rule 40(1)(a) mandates a reduction of credit by 5 percentage points for every quarter or part thereof from the date of the invoice or receipt of the goods. The declaration must be filed in Form GST ITC-01 within 30 days of eligibility, certified by a CA/CMA if the claim exceeds Rs 2,00,000, and verified with supplier data in Form GSTR-1.

Example - Supply of Plant and Machinery (Section 18(1)(c) read with Rule 40(1)(a))

Computation Explanation: The estimated useful life of capital goods is considered to be 20 quarters (or five years). Since the machinery has been used for 4 quarters under the composition scheme, the remaining useful life is 16 quarters. Therefore, the eligible ITC is Rs 1,20,000 × 16/20, which equals Rs 1,92,000.

As a result, Naman Ltd. can confidently claim Rs 1,92,000 in input tax credit for plant and machinery when switching to the regular scheme. The Rs 48,000 from the 4 quarters already used will be regarded as consumed. Don't forget: the company must submit Form GST ITC-01 within 30 days, along with the required certification and reconciliation.

(d) When an Exempt Supply Becomes Taxable

When a supply that was previously exempt from tax becomes taxable, the registered person becomes entitled to ITC on inputs held in stock, inputs contained in semi-finished or finished goods, and capital goods exclusively used for the exempt supply as on the day immediately preceding the date of taxability. Input services remain excluded.

According to Rule 40(1)(a), the credit on capital goods will be decreased by five percentage points. points for every quarter or part thereof from the date of invoice. The remaining ITC, relatable to the unexpired useful life, becomes available.

Example - Supply of Plant and Machinery (Section 18(1)(d) read with Rule 40(1)(a))

Computation Explanation: The total useful life of the capital goods is 20 quarters (five years). As the machinery was exclusively used for exempt supply for five quarters, only the remaining 15 quarters are eligible for credit. Hence, ITC = Rs 1,20,000 × (15 ÷ 20) = Rs 90,000.

Sonica Ltd. will therefore be eligible to claim Rs 90,000 as ITC when its supply becomes taxable, while Rs 30,000 is considered lapsed for the expired period. The declaration in Form GST ITC-01 must be filed within 30 days, and, if the claim exceeds Rs 2,00,000, it must be duly certified by a CA/CMA and verified against supplier data in Form GSTR-1.

2. The One-Year Invoice Bar - Section 18(2)

Make sure to claim your credit under Section 18(1) within one year of the date on the relevant tax invoice. If you miss this deadline, the claim will no longer be valid, so it's best to act quickly!

3. Transfer of ITC on Change in Constitution - Section 18(3)

When a registered person carries out actions such as selling, merging, demerging, amalgamating, leasing, or transferring their business with a specific clause for liability transfer, he can transfer any remaining ITC in the electronic credit ledger to the new owner. The procedure requires submitting Form GST ITC-02, obtaining approval from the transferee, and securing certification from a CA or CMA for the liability transfer. This ensures that the process is transparent and efficiently managed.

In the event of a demerger, ITC is to be apportioned in proportion to the value of total assets as specified in the demerger scheme.

Transfer of Credit on Obtaining Separate Registration - Rule 41A

Rule 41A is applicable when a registered person gets separate registration for different business locations within a State or Union Territory, as outlined in Rule 11 of the CGST Rules. They can smoothly transfer unutilised ITC to these newly registered units, proportional to the assets they hold at the time of registration, by filing Form GST ITC-02A within 30 days. To make the transfer official, the transferee(s) need to accept these details electronically. This process helps ensure a clear and organized transfer of credits across multiple units within the same region.

Example - Allocation of ITC among Separately Registered Units (Rule 41A (1))

Kirti Ltd. is registered under GST at Tilak Nagar, New Delhi. On 1 May 2025, it obtains separate registrations for two additional places of business - Rajouri Garden and Rohini - under Rule 11 of the CGST Rules, 2017. The company has unutilised ITC of Rs 6,00,000 in its electronic credit ledger, which it intends to transfer to both locations.

The ratio of asset values is 2: 1. Therefore, ITC will be transferred as follows:

So, Rs 4,00,000 of ITC will be happily transferred to Rajouri Garden and Rs 2,00,000 to Rohini through Form GST ITC-02A, which should be filed within 30 days of registration. The transferees need to accept the transfer in the portal; then the amounts will appear in their electronic credit ledgers. Both units are also encouraged to record the transfer in their books of accounts to keep everything clear and organised.

Closing Reflection - The Flow of Credit and the Continuity of Business

Let's explore how the input tax credit has developed over time, from its initial recognition to its lawful transfer during organisational changes. Section 18(1) explains the conditions that bring the credit into existence-such as when a person registers voluntarily, exits the composition scheme, or when exempt supplies become taxable. This marks the beginning of a taxpayer's journey with the credit system. Then, Section 18(2) safely limits this entitlement by setting a one-year time frame from the invoice date, helping ensure that the credit remains a current, verifiable economic right rather than an open-ended perk.

Section 18(3) thoughtfully extends this important discipline into the world of business reorganization. When there's a change in ownership, structure, or control due to mergers, demergers, sales, or transfers, the credit isn't lost. Instead, it continues to flow smoothly, passing from one entity to another through the process outlined in Rule 41. This approach not only maintains financial consistency but also highlights the core GST principle that the right to credit belongs to the business as a whole, rather than just the individual legal entity holding it at any given moment. The requirements for electronic filing, certification by a Chartered or Cost Accountant, and approval by the transferee help ensure the process remains transparent and easy to audit, safeguarding tax fairness.

Together, Sections 18(1) to 18(3) highlight the positive side of GST credit-they support, organise, and ensure the smooth flow of tax benefits in sync with business activities. However, the credit system can't be open-ended; when eligibility ends, the law steps in to restore fairness. This is addressed in Sections 18(4) to 18(6), which we'll cover in Part II. These parts serve as a balance of justice, in which credits given must be reviewed, reduced, or adjusted as needed.

In the architecture of GST, credit isn't just a simple financial entry; it's a meaningful reflection of the entire system. fairness in motion.

Part II continues this idea beautifully, demonstrating how Section 18 thoughtfully brings everything full circle after opening it with such careful consideration.