Most small businesses start with the Composition Scheme because it’s easy, low-tax, and paperwork-free. But as soon as turnover grows or compliance needs rise, they switch to the Regular Scheme. And when business slows down, they sometimes switch back to composition.
And during this switching, the biggest confusion is:
“What happens to ITC when I enter or exit the Composition Scheme?”
The confusion is natural because two major laws get triggered:
- Section 10 (Composition Scheme)
- Section 18 (Special ITC circumstances)
Plus two rules:
- Rule 40 (ITC on capital goods when switching TO regular)
- Rule 44 (ITC reversal on switching TO composition)
This blog explains everything simply, with clear examples that match real-life situations.
1. First, Understand the Core Logic
Composition taxpayers cannot take ITC.
Regular taxpayers can take ITC.
So naturally:
✔ When switching from Composition → Regular
You become eligible to take ITC.
✔ When switching from Regular → Composition
You must reverse previously taken ITC.
That’s the whole idea of Sections 10 and 18.
2. Switching From Composition → Regular Scheme (Section 18(1)(c))
This is the case where you start paying normal GST and become eligible to:
- issue tax invoice
- charge GST
- take ITC
- claim refunds
- make inter-state supplies
Since composition dealers didn't get any ITC earlier, the law now allows ITC on the following:
- Inputs held in stock
- Inputs in semi-finished goods
- Inputs in finished goods
- Capital goods (proportionately)
You must claim this ITC through:
FORM GST ITC-01 (“Declaration for claim of ITC under Section 18(1)(c)”)
2.1 Time Limit to Claim ITC
ITC on switch-over must be claimed:
within 30 days of becoming eligible
(Extendable by officer)
2.2 ITC on Inputs — Simple
Take full ITC on:
- raw material
- packing material
- purchased stock
- semi-finished goods
- finished goods
based on invoice GST.
2.3 ITC on Capital Goods — Special Rule
Now here’s the tricky part—ITC on capital goods.
Rule 40 says:
“ITC = Total GST × (Remaining useful life ÷ 60 months) ”
Useful life of capital goods = 5 years (60 months).
Example
You bought a machine:
- Value: ₹5,00,000
- GST: ₹90,000
- Used in composition scheme for: 18 months
Remaining life = 42 months
ITC allowed = 90,000 × 42/60 = ₹63,000
This must be entered in ITC-01.
2.4 Example – Switching From Composition to Regular
A trader under composition decides to shift to regular scheme on 1st June.
Stock on 31 May:
- Raw materials (GST on invoices): ₹35,000
- Finished goods (GST on invoices): ₹42,000
- Machinery (GST): ₹60,000 Used for 10 months → Remaining life: 50 months
Capital goods ITC = 60,000 × 50/60 = ₹50,000
Total ITC claimable
= 35,000 + 42,000 + 50,000 = ₹1,27,000
Declare in ITC-01.
3. Switching From Regular → Composition (Section 18(4))
This is the reverse situation.
Now, because composition dealers cannot keep ITC, you must:
- Reverse ITC on all stock
- Reverse ITC on inputs in semi-finished and finished goods
- Reverse ITC on capital goods (proportionately)
This reversal must be done through:
FORM GST ITC-03
3.1 Capital Goods ITC Reversal (Rule 44)
Rule 44 tells how to reverse capital goods ITC.
Formula:
“Reversal = Total ITC taken × (Remaining life ÷ 60 months) ”
Same formula as earlier—except this time, we reverse it.
Example
- Machine bought with GST ₹60,000
- Used for 24 months
- Remaining life = 36 months
Reversal = 60,000 × 36/60 = ₹36,000
This amount must be reversed in ITC-03.
3.2 Example – Switching From Regular to Composition
A business wants to switch to composition from 1st April.
ITC originally claimed:
- Inputs: ₹35,000
- Finished goods: ₹20,000
- Machinery ITC taken: ₹90,000 Used for 36 months → Remaining life: 24 months
Capital goods reversal = 90,000 × 24/60 = ₹36,000
Total ITC reversal required
= 35,000 + 20,000 + 36,000 = ₹91,000
Must be reversed in ITC-03 before opting for composition.
4. Key Forms Required (Very Important)
| Case | Form | Purpose |
| Composition → Regular | ITC-01 | Claim eligible ITC |
| Regular → Composition | ITC-03 | Reverse ITC |
| Business Transfer | ITC-02 | Transfer ITC |
5. Common Mistakes in Composition Switching
These are REAL mistakes taxpayers make:
- Not filing ITC-01 in 30 days
- Taking ITC on invoices older than 1 year (not allowed)
- Forgetting capital goods ITC calculation
- Not maintaining stock statement
- Not reversing ITC while switching to composition
- Calculating ITC based on current value instead of invoice GST
These mistakes lead to notices under:
- Section 73
- Section 74
- Audit
- Scrutiny
6. Special Case: If You Cross Composition Turnover Limit
If your turnover crosses:
- ₹1.5 crore (general case), or
- ₹75 lakh (special category), or
- ₹50 lakh (composition services – 6% scheme)
Then:
- You automatically become a regular dealer
- ITC becomes available from the date of crossing
- File ITC-01 to claim credit
Same rules of Section 18(1)(c) apply.
7. Special Case: Voluntary Composition Switching
If you choose to enter composition:
- You must reverse entire ITC
- Must file ITC-03
If you choose to exit composition:
- You must file ITC-01
- Can claim eligible ITC as per invoices
8. Important Difference
| Scenario | ITC on Stock | ITC on Capital Goods | Form | Rule |
| Comp → Regular | ✔ Allowed | ✔ Allowed (proportionate) | ITC-01 | Rule 40 |
| Regular → Comp | ❌ Must reverse | ❌ Must reverse (proportionate) | ITC-03 | Rule 44 |
9. Time Limits You Must Remember
- ITC under Section 18(1)(c) must be claimed within 30 days of becoming eligible.
- Invoices should not be older than 1 year for claiming ITC.
- ITC reversal must be done before opting for composition.
10. Final Summary in Simple Words
Switching schemes under GST affects your ITC big time. Remember these two rules:
✔ Composition → Regular → Claim ITC
(Inputs + capital goods)
✔ Regular → Composition → Reverse ITC
(Inputs + capital goods)
And always use:
- ITC-01 for claiming
- ITC-03 for reversing
If you follow these simple rules, changing schemes becomes easy and error-free.
