GST Basics #13: Section 18 — Input Tax Credit When Your Status Changes

Section 18 of the CGST Act handles the moments when your GST status changes — you register, you leave composition, an exempt supply turns taxable, or you sell the business — and decides what happens to the tax already sitting in your stock.

Most of the input tax credit rules assume a steady state: you are registered, you buy, your supplier reports the invoice, you claim. Section 18 of the CGST Act deals with the untidy moments in between, when your status changes and stock you already own has tax sitting inside it. It works in both directions, giving credit when you come into the tax net and taking it back when you leave.

Coming in. Section 18(1) has four limbs. If you cross the registration threshold and apply within thirty days of becoming liable, you may take credit on 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 you became liable to pay tax. If you register voluntarily under Section 25(3), the same credit is available as on the day immediately preceding the grant of registration. If you leave the composition scheme and become liable under Section 9, you get credit on that stock and on capital goods as well. And if a supply of yours that was exempt becomes taxable, you may claim credit on the stock relatable to that supply and on capital goods used exclusively for it. In the last two cases the capital goods credit is scaled down by a prescribed percentage reflecting the use you have already had out of the asset.

Two limits matter. Credit under Section 18(1) is subject to conditions and restrictions prescribed by the rules, which require a declaration on the portal in the prescribed form within a prescribed time. And Section 18(2) bars credit on any supply where more than one year has passed since the date of the tax invoice, however good the claim otherwise looks.

Going out. Section 18(4) is the mirror image: if you opt into composition, or your supplies become wholly exempt, you must pay back an amount computed on the stock and capital goods you hold, in the prescribed manner. Section 18(6) deals with selling capital goods or plant and machinery on which you took credit: you pay the higher of the credit taken as reduced by the prescribed percentage points, or the tax on the transaction value. Refractory bricks, moulds and dies, jigs and fixtures supplied as scrap are the exception and are taxed on transaction value.

Section 18(3) covers restructuring. On a sale, merger, demerger, amalgamation, lease or transfer of the business, unutilised credit in the electronic credit ledger may be transferred to the new entity in the prescribed manner, provided the liabilities go with it.

Read this with Section 16 on the conditions for credit and Section 17 on blocked credits, covered in the two previous instalments, and with Section 10 on composition. The Explanation confines plant and machinery to apparatus and equipment fixed to earth, excluding land, buildings, civil structures, telecommunication towers and pipelines laid outside factory premises.

Official text: https://cbic-gst.gov.in/pdf/CGST-Act-Updated-01082021.pdf

Topics:section 18 CGSTinput tax credit stockITC on registrationcomposition to regularexempt becomes taxablecapital goods credittransfer of credit mergerGST basicsITC reversalplant and machineryone year limit ITCChennai GST

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