The Input Tax Credit (ITC) mechanism is a fundamental feature of GST. However, ITC is not static; its availability depends on the registration status of the taxpayer and the taxability of supplies.
To deal with special events such as change in registration status, exemption becoming taxable, or shifting from one scheme to another, the GST law provides a detailed mechanism for availability or reversal of ITC.
These situations are primarily governed by Section 18 of the CGST Act, 2017 and Rule 40 of the CGST Rules, 2017.
Availability of ITC in Special Circumstances – Section 18(1):
A registered person may be entitled to ITC in certain special circumstances, as explained below.
1. Fresh Registration (Section 18(1)(a))
When a person becomes liable to register under GST and applies for registration within 30 days, ITC can be claimed on:
-
Inputs held in stock
-
Inputs contained in semi-finished goods
-
Inputs contained in finished goods
Eligibility:
-
The ITC is allowed only for the stock held on the day immediately before the date from which the person becomes liable to pay tax.
Example: A trader crosses the threshold limit on 10 June and applies for registration on 20 June. He becomes liable from 10 June. He can claim ITC on stock held on 9 June.
2. Voluntary Registration (Section 18(1)(b))
If a person voluntarily takes registration even though not liable, ITC is allowed on:
-
Inputs held in stock
-
Inputs in semi-finished and finished goods
Eligibility: ITC is available on the stock as on the day immediately preceding the date of registration.
3. Exempt Supply Becomes Taxable (Section 18(1)(c))
If goods or services which were earlier exempt become taxable, the registered person can claim ITC on:
-
Inputs held in stock
-
Inputs in semi-finished and finished goods
Eligibility:
-
ITC is available on stock as on the day immediately before the date from which supply becomes taxable.
4. Composition to Regular Scheme (Section 18(1)(d))
When a taxpayer opts out of the composition scheme and becomes a regular taxpayer, ITC is allowed on:
-
Inputs held in stock
-
Inputs in semi-finished and finished goods
-
Capital goods (reduced by prescribed percentage)
Important: Capital goods ITC is reduced at 5% per quarter or part thereof, calculated from the invoice date.
Reversal of ITC in Special Circumstances – Section 18(4) and Section 18(6):
There are situations where ITC already availed must be reversed.
1. Regular Taxpayer Opts for Composition Scheme or Becomes Exempt (Section 18(4))
When a taxpayer:
-
Switches from the regular scheme to the composition scheme, or
-
When their taxable supplies become wholly exempt,
then they must reverse the ITC already claimed on:
-
Inputs held in stock
-
Inputs in semi-finished and finished goods
-
Capital goods (reduced by prescribed percentage)
The reversal ensures that ITC is not enjoyed for supplies that are not taxable under GST.
2. Sale or Disposal of Capital Goods (Section 18(6))
When a taxpayer sells or disposes of capital goods or plant and machinery on which ITC was availed, he must pay the higher of:
-
ITC taken on the capital goods reduced by 5% per quarter from the date of invoice, OR
-
Tax on the transaction value of such goods.
This prevents the taxpayer from enjoying ITC benefit while also transferring the asset.
3. Rule 40 – Manner of Claim and Reversal
Rule 40 of the CGST Rules, 2017 provides the detailed manner:
-
For capital goods, ITC amount is reduced by 5% per quarter or part thereof.
-
The remaining credit (after deduction) can be claimed (in case of availability) or must be reversed (in case of liability).
4. Filing and Documentation
Form GST ITC-01
To be filed online to claim ITC under Section 18(1).
It must detail:
-
-
Stock of inputs,
-
Stock of semi-finished and finished goods,
-
Capital goods (if applicable).
-
Form GST ITC-03
-
Used for reversal of ITC when a taxpayer switches to composition or supplies become exempt.
Practical Examples:
Example 1 – Fresh Registration
A trader becomes liable for registration on 5 August 2024.
He applies for registration on 20 August and gets the certificate dated 15 September.
He is eligible to claim ITC on all stock held as on 4 August 2024.
Example 2 – Exempt Becomes Taxable
Suppose a small-scale manufacturer was selling a product exempt from GST. From 1 January 2025, the exemption is withdrawn.
He can claim ITC on stock held as on 31 December 2024.
Example 3 – Reversal Due to Composition
A regular taxpayer with ITC balance of ₹2,00,000 opts for composition on 1 April 2025.
He has to reverse the ITC on stock, semi-finished goods, and proportionate ITC on capital goods in GST ITC-03.
Example 4 – Sale of Capital Goods
A machine purchased in January 2022 (ITC availed ₹1,00,000) is sold in June 2025 for ₹3,00,000.
ITC to be reversed = ₹1,00,000 – (5% × 14 quarters) = ₹30,000.
Tax on transaction value @18% = ₹54,000.
Higher amount (₹54,000) must be paid.