Section 18 handles credit at the edges of the GST system — when a business enters it, changes scheme, changes hands, or sells its capital goods. It lets credit in where tax was paid on stock before the business could claim it, and takes credit back where the business leaves the taxable chain.
Key points
- Under section 18(1) of the CGST Act, 2017 credit may be taken on inputs held in stock (and, in some cases, capital goods) when a person registers within thirty days of becoming liable, registers voluntarily, leaves the composition scheme, or when its exempt supplies become taxable.
- Credit under section 18(1) cannot be taken on an invoice more than one year old (section 18(2)).
- On a sale, merger, demerger, amalgamation, lease or transfer of business with transfer of liabilities, unutilised credit may be transferred to the transferee (section 18(3)).
- A person moving to composition, or whose supplies become wholly exempt, must pay back credit on stock and capital goods, and the balance lapses (section 18(4)).
- On supplying capital goods on which credit was taken, the supplier pays the higher of the credit taken less prescribed percentage points and the tax on transaction value (section 18(6)).
The provisions
18(1)–(2)Credit on stock in special circumstances
Statutory text
(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.
*Enforced w.e.f. 1st July, 2017.
18(3)Transfer of credit with the business
Statutory text
(3) Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.
What it means
Where the constitution of a registered person changes on sale, merger, demerger, amalgamation, lease or transfer of business "with the specific provisions for transfer of liabilities", unutilised credit may be transferred to the transferee (Form GST ITC-02, Rule 41). On a demerger, credit is apportioned in the ratio of the value of assets of the new units.
18(4)–(6)Reversal; sale of capital goods
Statutory text
(4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption:
Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.
(5) The amount of credit under sub-section (1) and the amount payable under sub-section (4) shall be calculated in such manner as may be prescribed.
(6) In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher:
Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.
What it means
Sub-section (4): a person who opts for composition, or whose supplies become wholly exempt, pays an amount equal to the credit on inputs in stock (including in semi-finished and finished goods) and on capital goods (reduced by prescribed percentage points), by debit to the credit or cash ledger; any balance then lapses (Rule 44).
Sub-section (6): on supplying capital goods or plant and machinery on which credit was taken, the supplier pays the higher of (i) the credit taken reduced by prescribed percentage points — five per quarter or part of a quarter from the invoice date under Rule 40(2) — and (ii) tax on the transaction value. Refractory bricks, moulds, dies, jigs and fixtures sold as scrap may simply bear tax on transaction value.
Statutory text as published on the CBIC tax information portal, as on 03.10.2026; the numbered notes record each amendment. Official source
Common questions
- Can a new GST registrant claim credit on opening stock?
- Yes, if registration was applied for within thirty days of becoming liable (section 18(1)(a)), for inputs in stock, and on invoices not more than one year old.
- What happens to unused ITC on a business merger or sale?
- It may be transferred to the transferee where the liabilities are also transferred (section 18(3), Form GST ITC-02).
Commentary and case notes checked against the judgments and CBIC sources on 04.10.2026.
What it means