Understanding Input Tax Credit (ITC) in Special Circumstances under Section 18 of GST Act

Section 18 of the Central Goods and Services Tax (CGST) Act, 2017, deals with the availability and eligibility of Input Tax Credit (ITC) in special circumstances. Unlike the general provisions for claiming ITC under Section 16, Section 18 provides specific rules for claiming ITC in cases such as change in business constitution, exempt supplies, and capital goods. Section 18 is divided into several sub-sections, each addressing ITC eligibility in specific scenarios. Below is a detailed analysis of Section 18:

In this article we are going to discuss Section 18(1) and Section 18(2) along with Rule 40 of CGST Rules 2017, which states the provisions for entitlement of ITC at the time of registration or voluntary registration or switching to regular tax paying status or coming into tax-paying status.

So let us first see what Section 18(1) and 18(2) says:

Section 18(1) & (2):

Availability of credit in special circumstances.-

(1) Subject to such conditions and restrictions as may be prescribed-

(a) a person who has applied for registration under this Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall be entitled to take credit of input tax in respect of 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 he becomes liable to pay tax under the provisions of this Act;

(b) a person who takes registration under sub-section (3) of section 25 shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration;

(c) where any registered person ceases to pay tax under section 10, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9:

Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed;

(d) where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable:

Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed.

(2) A registered person shall not be entitled to take input tax credit under sub-section (1) in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply.

So, we are going to discuss all 4 points over here:

1.   Person who has applied for registration within 30 days from the date on which he becomes liable to registration and has been granted such registration:

A person applying for GST registration within thirty days of becoming liable is entitled to claim input tax credit on inputs, as well as semi-finished or finished goods, held in stock on the day immediately preceding the date of liability.

For example, ‘Z’ becomes liable to pay tax on 1st August and has obtained registration on 15th August w.e.f. 1st August. ‘Z’ is eligible for ITC on inputs held in stock and as part of semi-finished goods or finished goods held in stock as on 31st July. ‘Z’ cannot take ITC on capital goods.

Although, ITC can be availed within 1 year from the date of the issue of the tax invoice by the supplier. That means Mr. Z (from the above example), can avail ITC of goods purchased whose invoice date is not older than 1 year from the date on which he files form GST ITC-01.

2.  Person who is not required to register, but obtains voluntary registration:

For those registering under Section 25(3) of the GST Act, i.e., voluntary registration, the entitlement extends to claiming input tax credit on inputs, semi-finished, or finished goods held in stock on the day immediately preceding the date of registration.

For example, A applies for voluntary registration on 5th June and obtains registration w.e.f. 22nd June. A is eligible for ITC on inputs held in stock and as part of semi-finished goods or finished goods held in stock as on 21st June. ‘A’ cannot take ITC on capital goods

Similarly, as point 1, ITC can be availed within 1 year from the date of the issue of the tax invoice by the supplier.

3.   Registered person who ceases to pay composition tax and switches to the regular scheme:

In the event a registered person ceases to pay tax under the composition scheme, they are entitled to claim input tax credit on inputs, semi-finished, or finished goods, and on capital goods. The credit is available on the day immediately preceding the date from which the person becomes liable to pay tax under regular scheme. It is noteworthy that in this point, unlike point 1 & 2, ITC on capital goods can also be availed. Although ITC on capital goods will be reduced by 5% per quarter of a year or part of the quarter from date of invoice.

For example, ‘B’, a registered taxable person, was paying tax under composition scheme upto 30th July. However, w.e.f. 31st July, ‘B’ becomes liable to pay tax under regular scheme. ‘B’ will be eligible for ITC on inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods as on 30th July. ITC on capital goods will be reduced by 5% per quarter or part thereof from the date of the invoice.

ITC to be availed within 1 year from the date of the issue of the tax invoice by the supplier.

4.   Registered person whose exempt supplies become taxable supplies:

When an exempt supply of goods or services becomes taxable, the registered person is entitled to claim input tax credit on related inputs and on capital goods exclusively used for the exempt supply.

For example, ABC Limited is dealing in product X which is exempted from GST. However, it became taxable w.e.f. 1st April 2024 vide a notification. ABC Limited will be eligible for ITC on product X held in stock in semi-finished or finished form held in stock. Also ABC limited will become eligible for ITC on capital good specifically used for producing Product B.

ITC to be availed within 1 year from the date of the issue of the tax invoice by the supplier.

Rule 40 manner of claiming ITC:

In all the previously outlined scenarios, it`s imperative for the registered individual to submit an electronic declaration via the Form GST ITC-01 on the common portal. This declaration should explicitly outline details concerning the inputs in stock, inputs within semi-finished or finished goods, and capital goods, corresponding to the respective dates mentioned in column (4) of the applicable table. The deadline for filing this declaration is within 30 days from the date when the registered person becomes eligible for availing Input Tax Credit (ITC). It`s noteworthy that this timeframe is extendable under the discretion of the Commissioner/Commissioner of State GST/Commissioner of UTGST.

Furthermore, if the cumulative claim for ITC, encompassing CGST, SGST/UTGST, and IGST, surpasses the threshold of Rs. 2,00,000, the declaration necessitates certification by a practicing Chartered Accountant or Cost Accountant. This stringent process ensures the accuracy and reliability of the ITC claim when it involves substantial amounts across different tax categories.

Key Provisions of Section 18

Section 18 is divided into several sub-sections, each addressing ITC eligibility in specific scenarios:

Section 18(1): ITC in Case of Change in Constitution of Business

• Applicability: When a business is transferred, merged, amalgamated, or demerged, the ITC lying in the electronic credit ledger of the transferor can be transferred to the transferee.
• Conditions:
  • The transfer must be a result of a specific order (e.g., court order, agreement).
  • The transferor must provide details of the ITC being transferred in the prescribed form (Form GST ITC-02).
  • The transferee must be eligible to claim ITC under the GST Act.
• Purpose: Ensures continuity of ITC claims during business reorganizations.

Section 18(2): ITC in Case of Switch from Composition Scheme to Regular Scheme

• Applicability: When a taxpayer switches from the composition scheme to the regular scheme, they become eligible to claim ITC on inputs held in stock, inputs contained in semi-finished or finished goods, and capital goods.
• Conditions:
  • The taxpayer must be registered under the regular scheme at the time of claiming ITC.
  • The ITC can only be claimed on inputs and capital goods used for taxable supplies.
  • The ITC must be claimed within a specified time limit (as prescribed by rules).
• Purpose: Facilitates a smooth transition from the composition scheme to the regular scheme.

Section 18(3): ITC in Case of Exempt Supplies Becoming Taxable

• Applicability: When a taxpayer switches from making exempt supplies to making taxable supplies, they become eligible to claim ITC on inputs held in stock, inputs contained in semi-finished or finished goods, and capital goods.
• Conditions:
  • The ITC can only be claimed on inputs and capital goods used for taxable supplies.
  • The ITC must be claimed within a specified time limit (as prescribed by rules).
• Purpose: Encourages businesses to transition from exempt to taxable supplies.

Section 18(4): ITC in Case of Capital Goods

• Applicability: When capital goods are used for both taxable and exempt supplies, ITC can be claimed proportionately based on the extent of use for taxable supplies.
• Conditions:
  • The taxpayer must reverse ITC if the capital goods are subsequently used exclusively for exempt supplies.
  • The reversal must be calculated on a pro-rata basis, considering the useful life of the capital goods.
• Purpose: Ensures fair allocation of ITC for capital goods used for mixed purposes.

Section 18(5): ITC in Case of Death of a Proprietor

• Applicability: In the event of the death of a sole proprietor, the ITC lying in the electronic credit ledger can be transferred to the successor.
• Conditions:
  • The successor must be a registered person under the GST Act.
  • The transfer must be supported by legal documentation (e.g., will, succession certificate).
• Purpose: Facilitates the transfer of ITC in case of the proprietor’s death.

Section 18(6): ITC in Case of Change in Registration

• Applicability: When a taxpayer changes their registration (e.g., from one GSTIN to another), the ITC lying in the electronic credit ledger can be transferred to the new registration.
• Conditions:
  • The transfer must be supported by proper documentation.
  • The new registration must be eligible to claim ITC under the GST Act.
• Purpose: Ensures continuity of ITC claims during changes in registration.