CGST Section 18 — Availability of credit in special circumstances

CGST Act · Availability of credit in special circumstances

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Quick Answer

Section 18 of the CGST Act, 2017 governs Availability of credit in special circumstances. It provides the core statutory basis, outlining the essential legal principles, rights, and liabilities under Indian indirect tax law. Section 18 GST: Availability of credit in special circumstances — eligibility, conditions, case laws and compliance impact under Indian tax law.

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Plain-English Explanation

Plain English Summary

Section 18 of the CGST Act deals with situations where a registered person can claim Input Tax Credit (ITC) under special circumstances, outside of the normal course of business. It also outlines how a registered person must reverse previously claimed ITC under specific scenarios. In essence, it ensures fairness and prevents unjust enrichment or loss to businesses during significant changes in their registration status or business operations.

This section applies to:

New Registrants: Businesses that become liable for GST and apply for registration within 30 days of crossing the threshold limit.
Voluntary Registrants: Individuals who obtain GST registration voluntarily, as allowed under Section 25(3) of the CGST Act.
Composition Scheme Switchers: Taxpayers who transition from the composition scheme (Section 10) to the regular scheme under Section 9.
Exempt to Taxable Supply: Businesses whose previously exempt goods or services become taxable.
Changes in Business Constitution: Businesses undergoing sale, merger, demerger, amalgamation, lease or transfer with specific provisions for liability transfer.
Regular to Composition Scheme Switchers: Taxpayers opting to switch into the composition scheme (Section 10) from the regular scheme.
Taxable to Exempt Supply: Businesses whose supply becomes wholly exempt.
Businesses selling capital goods or plant and machinery: that have previously availed ITC on the said goods.

Here are the key conditions and exceptions outlined in Section 18:

ITC on Stock: In scenarios (a), (b), (c), and (d) above, businesses can claim ITC on inputs held in stock, semi-finished goods, and finished goods held in stock on the day immediately preceding the date of registration, the date of becoming liable to tax under Section 9, or the date of becoming taxable, respectively.
ITC on Capital Goods: If a business switches from the composition scheme or an exempt supply to a regular scheme or taxable supply (scenarios (c) and (d)), ITC can also be claimed on capital goods. This ITC is, however, reduced by a percentage to be prescribed based on the remaining useful life of the asset.
Time Limit for ITC Claim: ITC cannot be claimed on invoices older than one year from the date of invoice issuance, as per subsection (2).
Transfer of ITC: In cases of business restructuring (sale, merger, etc.), unutilized ITC can be transferred to the new entity, provided there are specific provisions for liability transfer in the agreement, as per subsection (3).
Reversal of ITC: If a registered person opts for the composition scheme or their supplies become wholly exempt (subsection (4)), they must reverse ITC on stock, semi-finished goods, finished goods, and capital goods. This reversal is done by debiting the electronic credit ledger or cash ledger. Again, ITC on capital goods is reduced by a prescribed percentage. Any remaining ITC after this reversal lapses.
Sale of Capital Goods: If a business sells capital goods or plant and machinery on which ITC was claimed (subsection (6)), they must pay the higher of either: the ITC claimed on the goods, reduced by a prescribed percentage, or the tax on the transaction value of the goods (as determined under Section 15). An exception applies for refractory bricks, moulds, dies, jigs, and fixtures sold as scrap, where tax is payable only on the transaction value.
Manner of Calculation: Subsections (5) empowers the government to prescribe the manner of calculating ITC claims and reversal amounts under Section 18.

Practical Examples:

New Registrant: Suppose a business crosses the GST threshold on March 15th and applies for registration on March 25th. They receive registration on April 5th. They can claim ITC on inputs, semi-finished, and finished goods held in stock on March 14th.
Composition to Regular: A restaurant under the composition scheme decides to switch to the regular scheme. On the day before the switch, they have raw materials, partially prepared food, and finished dishes in stock. They can claim ITC on these items, along with a depreciated value of previously purchased ovens and kitchen equipment.
Sale of Business: Company A sells its manufacturing unit to Company B. The sale agreement includes a clause for the transfer of liabilities. Company A has ₹50,000 in unutilized ITC. This ITC can be transferred to Company B.
Opting into Composition Scheme: A boutique owner paying regular GST opts for the composition scheme. He has ITC in stock, in semi-stitched, and finished garments. He must reverse the ITC on these items.

Important Amendments:

While the core principles of Section 18 remain largely consistent, it's crucial to stay updated on any amendments or clarifications issued by the CBIC (Central Board of Indirect Taxes and Customs) through notifications, circulars, or orders. These often provide detailed guidance on calculation methods, prescribed percentage points for ITC reversal on capital goods, and procedural aspects of ITC transfer. Consult the official sources to be up to date on the changes.

This detailed explanation should help businesses understand the intricacies of Section 18 and ensure they comply with the GST law while optimizing their ITC claims. Always consult with a qualified tax professional for specific advice tailored to your individual 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 .

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Frequently Asked Questions

What are the specific 'special circumstances' under CGST Section 18 that allow a registered person to claim input tax credit (ITC)?

Section 18 covers several special circumstances. These include: (a) ITC on stock held on the day preceding the date of obtaining registration (Section 18(1)(a)), (b) ITC on stock held on the day preceding the date when a person liable to pay tax under the composition levy ceases to pay tax under it (Section 18(1)(b)), (c) ITC on stock held when exempt supplies become taxable (Section 18(1)(c)), (d) ITC on capital goods when a composition taxpayer switches to regular scheme (Section 18(1)(d)), (e) ITC in case of merger, amalgamation, etc. (Section 18(3)), and (f) ITC where there is change in the constitution of business (Section 18(4)).

If I convert from the composition scheme to the regular scheme, what ITC can I claim under Section 18 and what are the conditions?

Under Section 18(1)(b), you can claim ITC on inputs held in stock, inputs contained in semi-finished or finished goods held in stock, and capital goods on the day preceding the date from which you are liable to pay tax under the regular scheme. The ITC on capital goods is reduced by 5% per quarter or part thereof from the date of invoice. You must have valid invoices or documents for the stock and capital goods. An ITC-01 declaration needs to be filed within 30 days from the date of becoming eligible to claim the credit. Furthermore, the goods and capital goods should not have been manufactured or supplied wholly exempt from tax.

What is Form ITC-01 and when is it required to be filed under Section 18?

Form ITC-01 is a declaration form used to claim input tax credit under Section 18(1)(a), 18(1)(b), and 18(1)(c) of the CGST Act. It is required to be filed within 30 days from the date of becoming eligible to claim ITC under these specific circumstances, such as obtaining registration, converting from composition scheme to regular scheme, or when exempt supplies become taxable.

How is the ITC amount determined for capital goods when converting from composition to regular scheme under Section 18, and what happens if the invoices are very old?

The ITC on capital goods is calculated after reducing the tax amount at the rate of 5% per quarter (or part thereof) from the date of issue of the invoice. Even if the invoices are very old, the 5% reduction per quarter still applies. Therefore, if the invoice date is significantly old, the eligible ITC might be substantially reduced or even nil if the asset is fully depreciated according to the prescribed formula.

What happens to ITC if there is a change in the constitution of the business (e.g., sale, merger, demerger) under Section 18?

Section 18(3) and 18(4) address this situation. In case of a sale, merger, demerger, amalgamation, lease, or transfer of a business, the registered person can transfer the ITC to the transferee, provided the business is transferred as a going concern. This transfer is subject to conditions, including the proper transfer of liabilities related to the business. The transferor must file Form ITC-02 electronically, detailing the transfer, and the transferee must accept the details on the GST portal. The ITC will be transferred only after the transferee accepts the details in ITC-02.

Are there any specific restrictions or conditions on claiming ITC under Section 18?

Yes, several restrictions apply. The person claiming ITC must possess valid invoices or documents. The ITC cannot be claimed on goods/services used exclusively for personal consumption or for making exempt supplies. The time limit for claiming ITC under normal circumstances (as specified in Section 16(4)) also applies to claims made under Section 18. Also, the goods and/or capital goods on which ITC is claimed must not have been manufactured or supplied wholly exempt from tax.

If a previously exempt product becomes taxable, and I have stock on hand, can I claim ITC on the inputs used to manufacture that stock even if the invoices for those inputs are quite old?

Yes, under Section 18(1)(c), you can claim ITC on the inputs held in stock or inputs contained in semi-finished or finished goods held in stock. However, the invoices must be valid, and the ITC claim is subject to the time limit specified under Section 16(4) of the CGST Act (which currently is generally by 30th November of the following financial year, subject to any extensions). The ITC-01 form must be filed within 30 days. If the invoices are older than the prescribed time limit under Section 16(4), you will not be able to claim the ITC, even if the exempt product has become taxable.

Key Conditions & Requirements

Condition	Details
Registration within 30 days of becoming liable	A person who applies for registration within 30 days of becoming liable and is granted registration is entitled to input tax credit (ITC) on inputs held in stock, inputs in semi-finished goods, and inputs in finished goods held in stock on the day immediately preceding the date they became liable to pay tax.
Taking Registration under Section 25(3)	A person taking registration under Section 25(3) is entitled to ITC on inputs held in stock, inputs in semi-finished goods, and inputs in finished goods held in stock on the day immediately preceding the date of grant of registration.
Cessation of Tax Payment under Section 10	A registered person ceasing to pay tax under Section 10 is entitled to ITC on inputs held in stock, inputs in semi-finished goods, inputs in finished goods, and capital goods on the day immediately preceding the date they become liable to pay tax under Section 9. Credit on capital goods is subject to a prescribed reduction.
Exempt Supply Becoming Taxable	When an exempt supply becomes taxable, the registered person is entitled to ITC on inputs held in stock, inputs in semi-finished goods, inputs in finished goods relatable to the exempt supply and on capital goods exclusively used for the exempt supply on the day immediately preceding the date from which such supply becomes taxable. Credit on capital goods is subject to a prescribed reduction.
Time Limit for Availing ITC	A registered person is not entitled to ITC after one year from the date of issue of the tax invoice relating to such supply.
Change in Constitution of Registered Person	In case of a change in the constitution of a registered person due to sale, merger, demerger, amalgamation, lease, or transfer of business with specific provisions for transfer of liabilities, the unutilised ITC in the electronic credit ledger can be transferred to the new entity in the prescribed manner.
Opting for Composition Scheme or Becoming Wholly Exempt	When a registered person who has availed ITC opts to pay tax under Section 10 (Composition Scheme) or their supplies become wholly exempt, they must pay an amount equivalent to the ITC on inputs held in stock and inputs contained in semi-finished goods by debiting the electronic credit ledger or electronic cash ledger.

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Amendment History

Enforced w.e.f. 1st July, 2017.

No numbered amendments recorded for this section.