Section 18 of The Central Goods and Services Tax Act, 2017
Original Text
18. Availability of credit in special circumstances.
(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.
Visual Summary
New Registration
ITC available on Inputs held in stock.
No ITC on Capital Goods.
Switch to Regular Scheme
ITC available on Inputs AND Capital Goods.
Capital goods credit reduced by 5% per quarter.
Transfer of Business
Unutilized ITC transfers to the new entity (Merger/Sale).
Requires specific provision for transfer of liabilities.
Sale of Capital Goods
Pay higher of:
1. Tax on transaction value
2. ITC taken minus 5% per quarter.
Summary
Section 18 acts as a bridge for Input Tax Credit (ITC) when a business changes its status. Normally, you claim ITC when you buy goods. But what if you had stock before you registered? Or what if you switch from a scheme that doesn’t allow ITC (like Composition) to one that does?
This section allows businesses to claim credit on stock they already hold in these special transition phases. Crucially, it distinguishes between raw materials (Inputs) and machinery (Capital Goods). For new registrations, you generally only get credit for raw materials. However, if you are moving from an exempt status to a taxable status, you get credit for machinery too, subject to depreciation.
It also protects government revenue: if you sell a machine on which you claimed credit, or if you close your business, you must pay back a portion of that credit.
In-Depth Analysis
1. Entitlement to Credit on Stock (Section 18(1))
This subsection handles four distinct scenarios. The critical distinction is between Inputs (raw materials, semi-finished, finished goods) and Capital Goods.
- New Registration (Mandatory): If a person applies within 30 days of becoming liable, they can claim ITC on inputs held in stock on the day before liability arose. Note: No credit is allowed on capital goods here.
- Voluntary Registration: Similar to above, ITC is allowed on inputs held in stock on the day before registration grant. No capital goods credit.
- Composition to Regular: When a taxpayer exits the Composition Scheme, they are entitled to ITC on inputs AND capital goods. The credit on capital goods is reduced by 5% per quarter (or part thereof) from the date of invoice.
- Exempt to Taxable: If an exempt supply becomes taxable, ITC is allowed on related inputs and capital goods (used exclusively for that supply), subject to the 5% quarterly reduction.
2. The One-Year Limitation (Section 18(2))
A strict sunset clause exists: A registered person cannot claim ITC under Section 18(1) for any goods or services where the invoice is older than one year. This prevents digging up ancient invoices to claim credit upon registration.
3. Transfer of Business (Section 18(3))
In cases of amalgamation, merger, or sale, the unutilized ITC in the electronic credit ledger can be transferred to the new entity. A key condition is that the liabilities of the business must also be transferred. This is effectuated by filing Form GST ITC-02.
4. Reversal of Credit (Section 18(4) & 18(6))
Exiting GST/Switching to Composition: If a regular taxpayer switches to Composition or their goods become exempt, they must pay an amount equivalent to the ITC held in stock and capital goods (reduced by percentage points). The balance in the credit ledger lapses.
Sale of Capital Goods: If a machine on which ITC was taken is sold, the taxpayer must pay the higher of:
- Tax on the transaction value (actual sale price).
- ITC taken originally, reduced by 5% for every quarter of use.
Deep Research & Legal Precedents
Section 18 has been the subject of significant interpretation regarding the “vested right” of ITC and the mechanics of business transfers. Below are key legal developments.
1. Transfer of Business (Section 18(3))
The Authority held that transferring a specific business unit (e.g., an R&D unit) to a distinct entity constitutes a “transfer of business” under Section 18(3). This confirmed that unutilized ITC could be transferred via Form GST ITC-02 even if only a vertical of the company is transferred, provided liabilities are also transferred.
2. Sale of Capital Goods (Section 18(6))
The AAR clarified that Section 18(6) applies only when ITC has been taken on the capital goods. If a taxpayer sells a vehicle on which ITC was blocked (under Sec 17(5)), they do not need to perform the reversal calculation. Instead, tax is paid on the margin as per Notification No. 8/2018-Central Tax (Rate).
3. The Rule 40 vs. Rule 44 Anomaly
A persistent legislative anomaly exists in calculating the reversal amount for capital goods. Rule 40(2) prescribes a flat reduction of 5% per quarter. However, Rule 44(6) prescribes a pro-rata calculation based on remaining useful life in months. While the Finance Act 2024 did not amend the text of Section 18 to resolve this, experts generally advise paying the higher amount calculated to avoid litigation.
4. Retrospective Amendment Impact (Finance Act 2024)
While Section 18 itself was not textually amended in 2024, the retrospective amendment to Section 16(4) (relaxing time limits for FY 2017-18 to 2020-21) indirectly aids new registrants under Section 18(1) who might have struggled with time-barred claims during the initial GST implementation years.
Practical Examples
Example 1: Late Registration
Mr. A becomes liable for registration on July 1st (turnover crosses threshold). He applies for registration on August 15th (after 30 days).
Result: He can only claim ITC on invoices dated from the date of grant of registration. He loses the benefit of Section 18(1)(a) which allows credit on stock held immediately before liability, because he failed to apply within the 30-day window.
Example 2: Selling a CNC Machine
Company X bought a machine for ₹10 Lakhs (GST ₹1.8 Lakhs) in Jan 2020. They sell it in Jan 2022 for ₹4 Lakhs (Transaction Tax @ 18% = ₹72,000).
Calculation:
1. ITC taken: ₹1.8 Lakhs.
2. Usage: 2 years (8 quarters). Reduction: 8 * 5% = 40%.
3. Remaining ITC: 60% of ₹1.8 Lakhs = ₹1.08 Lakhs.
4. Tax on Transaction: ₹72,000.
Liability: Company X must pay ₹1.08 Lakhs (the higher amount) under Section 18(6).
Key Takeaways
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Timeliness is Key: New businesses must apply for registration within 30 days of liability to claim credit on opening stock. -
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Capital Goods Distinction: New registrations do not get ITC on capital goods held in stock. Only switches from Composition/Exempt to Regular/Taxable get this benefit. -
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Mergers: Always file Form ITC-02 and ensure the transfer deed explicitly mentions the transfer of liabilities. -
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Asset Sales: Selling used capital goods almost always requires a reversal calculation (5% per quarter reduction).
Process Flowchart: ITC Availability
Practice Questions
Q1. A person applies for registration 45 days after becoming liable. Can they claim ITC on inputs held in stock on the day before liability arose?
Show Answer
No. Section 18(1)(a) requires the application to be made within 30 days of becoming liable to be eligible for credit on opening stock.
Q2. When selling old capital goods on which ITC was taken, how is the amount payable calculated?
Show Answer
Under Section 18(6), it is the higher of: (a) Tax on the transaction value, or (b) ITC taken reduced by percentage points (5% per quarter).
Q3. Which form must be filed to transfer unutilized ITC during a merger?
Show Answer
Form GST ITC-02.
Related Provisions
| Section/Rule | Description |
|---|---|
| Section 16 | Eligibility and conditions for taking input tax credit. |
| Section 25 | Procedure for registration (relevant for 18(1)). |
| Rule 40 & 44 | CGST Rules prescribing the manner of claiming/reversing credit. |
Conclusion
Section 18 is a vital enabling provision that ensures the seamless flow of credit during the lifecycle events of a business—birth (registration), transformation (mergers/scheme changes), and death (cancellation). It balances the benefit to the taxpayer (allowing credit on stock) with the protection of revenue (requiring reversals on exit or asset sale). Understanding the distinction between “inputs” and “capital goods” in this section is the most critical factor for compliance.