When people talk about ITC, they usually think of the basic Section 16 & 17 rules. But there is one section that silently controls many uncommon but important situations — Section 18 of CGST Act.
This section deals with special circumstances, meaning situations where ITC becomes available/blocked/reversed not because of purchases, but because of what changes in your business. Things like:
- taking registration
- switching from composition to regular
- switching from regular to composition
- supply becoming taxable/exempt
- transfer of business
- change in ownership
- amalgamation, merger, sale
Many taxpayers miss these rules because they happen occasionally. But GST officers catch these instantly during scrutiny.
So this blog explains everything in a simple and practical style.
1. What Is Section 18?
Section 18 talks about 3 big things:
- When ITC becomes available (special cases)
- When ITC must be reversed (special cases)
- How ITC moves during business transfer / merger / sale
This section ensures ITC is fair, depending on your business status.
2. Section 18(1) – Cases Where You CAN Take ITC
Section 18(1) gives four special situations where ITC becomes available. Even though you didn’t have ITC earlier, you can now take it.
Let’s break them down.
2.1 Section 18(1)(a) – When You Become Liable for Registration
If your turnover crosses the threshold and registration becomes mandatory, you can take ITC on:
- stock of inputs
- inputs in semi-finished goods
- inputs in finished goods
This ITC must relate to goods held on the day before registration becomes effective.
Real Example
- You cross ₹40 lakh turnover on 5th September.
- You apply for GST on 20th September.
- Officer gives registration valid from 5th September.
You can take ITC on stock held on 4th September.
2.2 Section 18(1)(b) – Voluntary Registration
If you take voluntary registration (i.e., before threshold), you can take ITC on:
- inputs
- semi-finished goods
- finished goods
on the day before registration is granted.
Same as above — but for voluntary case.
2.3 Section 18(1)(c) – Switching from Composition → Regular Scheme
When you leave composition scheme and become a regular taxable person, you can claim ITC on:
- inputs
- semi-finished goods
- finished goods
- capital goods (proportionate ITC)
Capital goods ITC will be reduced based on:
“ITC = GST × (remaining useful life ÷ 60 months)”
Example
You bought machinery with GST ₹60,000, used for 12 months under composition.
- Remaining life = 48 months
- ITC = 60,000 × 48/60 = ₹48,000
You can claim ₹48,000 when switching to regular scheme.
2.4 Section 18(1)(d) – Exempt Supply Becomes Taxable
If you start supplying taxable goods/services which were earlier exempt, you can claim ITC on:
- inputs
- semi-finished goods
- finished goods
- capital goods (proportionately)
Example
- You run a healthcare clinic.
- Healthcare service is exempt.
- Later, you start providing cosmetic procedures (taxable).
You can claim ITC on:
- medicines in stock
- consumables
- capital equipment (proportionately)
3. Section 18(2) – Time Limit to Claim ITC (IMPORTANT)
You must claim ITC under Section 18(1):
“within 1 year from the date of invoice”
This special 1-year limit is different from normal Section 16(4).
Example
- Invoice date: April 2024
- You switch to regular scheme on March 2025
- You can claim ITC only if invoice ≤ 1-year old.
4. Section 18(3) – ITC on Transfer of Business
When business is transferred due to:
- sale
- merger
- amalgamation
- demerger
- lease
- or change in ownership of whole business
… ITC can be transferred to the new entity.
How?
Through FORM ITC-02.
Example
- Company A merges with Company B.
- Company A has ITC balance of ₹12 lakh.
- Then A files ITC-02, and the balance moves to B.
5. Rule 40 – How to Calculate ITC for Sec. 18(1) Cases
Rule 40 explains how ITC should be taken in cases:
- switching from composition
- exempt to taxable
- registration cases
Formula for capital goods
ITC = Total GST × Remaining life ÷ 60 months
If remaining life is less than 5 years, proportionate ITC only.
6. Rule 41 – Transfer of ITC on Business Transfer
Rule 41 applies when business is:
- sold
- merged
- demerged
- transferred
The supplier (transferor) must:
- file ITC-02
- upload CA certificate
- transfer ITC proportionately (in case of demerger)
Example
Company demerges into 2 units.
ITC must be allocated based on:
“Value of assets transferred”
Not turnover.
7. Rule 41A – Transfer of ITC from GSTR-3B to Electronic Credit Ledger (New)
This allows transferring ITC between GSTINs within the same PAN in case of:
- wrong reporting
- transitional issues
- system errors
This is useful when you:
- accidentally put ITC in IGST instead of CGST/SGST
- want to transfer credit between branches (if permitted)
8. Section 18(4) – Cases Where ITC Must Be Reversed
If you were earlier eligible but now become ineligible, ITC must be reversed.
Two main cases:
Case 1: Switching from Regular → Composition
If you switch FROM regular TO composition:
→ You must reverse ITC on:
- inputs
- semi-finished goods
- finished goods
- capital goods (based on remaining life)
Similar to Rule 40, but in reverse direction.
Example
- Machine bought with GST ₹60,000
- Used 20 months
- Remaining 40 months
Reversal = 60,000 × 40/60 = ₹40,000
Case 2: Supply Becomes Exempt
If taxable supply becomes exempt:
→ ITC must be reversed on stock and capital goods.
Example
- Restaurant becomes exempt under some notification.
- ITC must be reversed immediately.
9. Practical Examples (Section 18 Cases)
Example 1 – Voluntary Registration ITC
A freelancer voluntarily registers under GST. He holds:
- laptop
- printer
- raw materials
He can claim ITC on goods in stock before registration.
Example 2 – Switching from Composition → Regular
Trader under composition buys:
- machinery (₹5 lakh + 90,000 GST)
- Used 15 months.
Remaining life = 45 months, ITC = 90,000 × 45/60 = ₹67,500
Example 3 – Exempt → Taxable Supply Conversion
- A yoga centre (exempt) starts health club (taxable).
- ITC on all stock becomes available.
Example 4 – Business Transfer (ITC-02)
- Business sold to new owner.
- Old owner transfers ITC of ₹2 lakh through ITC-02.
Officer approves → new owner gets ITC.
10. Common Mistakes People Make in Section 18
- Claiming ITC without checking 1-year invoice limit
- Not reversing ITC when switching to composition
- Forgetting capital goods ITC reversal
- Not filing ITC-02 during business transfer
- Taking ITC on services (not allowed under 18(1))
- Not maintaining stock statement
Important:
Section 18 allows ITC on inputs only for most clauses. Not on input services.
11. Documents Required for Section 18 ITC
- Stock statement
- Invoice copies (max 1-year old)
- Capital goods depreciation proof
- Chartered Accountant certificate (ITC-02)
- Declaration on GST portal
12. Final Human-Friendly Summary
Section 18 controls ITC not based on purchases, but on business situations. Whenever your business status changes, your ITC status changes.
- Registration → Take ITC
- Voluntary registration → Take ITC
- Composition → Regular → Take ITC
- Regular → Composition → Reverse ITC
- Exempt → Taxable → Take ITC
- Taxable → Exempt → Reverse ITC
- Business transfer → Transfer ITC
If you understand Section 18, you can handle all unusual ITC cases without fear.
