Section 18: ITC

Section 18 of the CGST Act, 2017 is the bridge clause that decides how Input Tax Credit (ITC) is gained or lost when a business changes its GST status. In 2026, with composition migrations rising, exemption notifications shifting, and registration cancellations being processed in larger volumes, Section 18 is the difference between protecting working capital and losing it overnight.

The four core situations under Section 18(1)

• 18(1)(a) — A person applying for fresh registration can claim ITC on inputs held in stock and inputs contained in semi-finished and finished goods on the day immediately preceding the date of registration grant.
• 18(1)(b) — A person taking voluntary registration can claim ITC on inputs in stock on the day immediately preceding the date of registration.
• 18(1)(c) — A composition taxpayer who becomes a regular taxpayer can claim ITC on inputs in stock, inputs in semi-finished/finished goods, and capital goods (reduced by prescribed percentage points per quarter).
• 18(1)(d) — A person making exempt supplies that subsequently become taxable can claim ITC on inputs and capital goods used for such supplies.

Form ITC-01 and the 30-day clock

Each of the four scenarios above requires the taxpayer to file Form ITC-01 within 30 days from the date of becoming eligible to claim ITC. The form lists invoice-wise stock with supplier GSTIN, invoice number, and tax amount. Importantly, the invoices must be no older than one year from the date the registration becomes effective.

Reversal under Section 18(4)

Section 18(4) is the mirror image — when a regular taxpayer switches to the composition scheme or when supplies become wholly exempt, the taxpayer must reverse ITC on stock and capital goods held. For capital goods, the reversal is computed on the basis of useful life of five years, on a pro-rata basis. The reversal is reported in Form ITC-03.

Transfer of ITC on business restructuring — Section 18(3)

1. On sale, merger, amalgamation, lease, or transfer of business with specific provision for transfer of liabilities, the transferor can transfer unutilised ITC to the transferee.
2. Form ITC-02 is filed by the transferor with details of the unutilised credit being transferred.
3. The transferee accepts the transfer on the portal, and the credit gets reflected in their electronic credit ledger.
4. A chartered accountant or cost accountant must certify the transfer in case of demerger, with apportionment based on the value of assets transferred.

Practical pitfalls in 2026

• Missing the 30-day Form ITC-01 deadline — credit is permanently lost.
• Including invoices older than one year in Form ITC-01.
• Forgetting to reverse ITC on capital goods when shifting to composition.
• Wrong apportionment in demerger leading to mismatches with the transferee's books.
• Not aligning Section 18 claims with GSTR-2B — IMS actions matter here too.

Reversal mechanics for capital goods

Reversal of ITC on capital goods under Section 18(4) follows a five-year useful life assumption. If a regular taxpayer opts for composition after using a machine for two years, ITC needs to be reversed only for the remaining three years (proportionate). Rule 44 prescribes the exact computation, with monthly or quarterly proration depending on remaining life.

The mirror situation — capital goods held when supplies move from exempt to taxable — allows ITC claim under Rule 40, again on a proportionate basis. Maintain a capital goods register with invoice date, useful life start, and category (eligible/blocked under Section 17(5)) to make these computations defensible during audit.

Worked example: composition to regular shift

A composition taxpayer with stock of ₹50 lakh (GST ₹9 lakh at average 18%), semi-finished goods of ₹10 lakh (GST ₹1.8 lakh), and capital goods purchased 18 months earlier worth ₹20 lakh (GST ₹3.6 lakh) shifts to regular scheme. Form ITC-01 will claim ₹9 lakh on stock, ₹1.8 lakh on SFG, and ₹3.6 lakh on capital goods reduced by 30% (six quarters elapsed of 20 useful quarters) — net ₹2.52 lakh on capital goods.

Total claim under ITC-01 — ₹13.32 lakh — must be filed within 30 days of regularisation. Each invoice must be valid (not older than one year for inputs) and the supplier's GSTR-1 must reflect the corresponding outward supply, otherwise ITC will not flow.

Conclusion

Section 18 is unforgiving on timelines but generous on substance. Whether you are registering for the first time, leaving the composition scheme, or restructuring a business, plan the ITC mechanics before the status change — not after. A 30-day diary reminder around the trigger date can save lakhs of credit that would otherwise vanish into the ledger.