Paying Back Credit on Opting for Composition or Exemption: ITC-03

A business that moves into the composition scheme, or whose supplies become wholly exempt, has usually taken credit on goods it still holds. The law requires that credit to be paid back. FORM GST ITC-03 is where the amount is worked out and paid, and after it is paid, whatever is left in the credit ledger lapses. The difficulties are practical: valuing stock with no invoice, scaling down capital goods by the month, and meeting a sixty-day deadline that applies to one of the two cases only.

This guide covers when the payment arises, how rule 44 computes it, the form and portal steps, and what follows if it is not filed. Opting in is covered in Opting In and Out of the Composition Scheme. The reverse movement, taking credit on leaving composition, is in Credit on Registration or Leaving Composition: ITC-01.

When section 18(4) applies

Section 18(4) of the CGST Act applies where a registered person who has availed of credit “opts to pay tax under section 10” or where the goods or services “supplied by him become wholly exempt”. The person “shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax” on:

• inputs held in stock
• inputs in semi-finished or finished goods held in stock
• capital goods, “reduced by such percentage points as may be prescribed”

The stock is taken “on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption”.

Two points of scope follow from the text.

Wholly exempt only. A business that keeps some taxable supplies does not file ITC-03. A partial exemption is handled by apportionment under section 17(2) and rules 42 and 43, described in Common Credit, Step by Step: Rules 42 and 43. Rate changes such as those notified on 17 September 2025 can exempt particular goods or services. They bring section 18(4) into play only for a person whose supplies all become exempt.

Not cancellation. On cancellation of registration, section 29(5) imposes a different amount, the credit on stock “or the output tax payable on such goods, whichever is higher”. That amount is reported in GSTR-10, not ITC-03 (rule 44(4)). Filing the Final Return, GSTR-10 covers it.

The sixty days, and where they come from

The sixty-day period is in rule 3(3), and it applies to composition only. A registered person opting in files FORM GST CMP-02 “prior to the commencement of the financial year”. The same person “shall furnish the statement in FORM GST ITC-03 in accordance with the provisions of sub-rule (4) of rule 44 within a period of sixty days from the commencement of the relevant financial year”. For the year 2027-28, the period runs from 1 April 2027.

Two other provisions in rule 3 are spent. The proviso for 2020-21 fixed 31 July 2020. Rule 3(3A), for those opting in by 31 March 2018, allowed 180 days.

For an exemption, no rule fixes a period for ITC-03. The amount is fixed by section 18(4) as at the day before the exemption, and rule 44(4) makes it part of output tax liability from then.

The portal’s FAQ says ITC-03 for composition can be filed “only once in a financial year”. For exemption, it can be filed “multiple times, as and when notifications exempting such supplies are issued”.

The computation under rule 44

Inputs and goods in process or finished. Under rule 44(1)(a), the credit is “calculated proportionately on the basis of the corresponding invoices on which credit had been availed”. The form allows “first in first out” where an item cannot be traced to its invoice.

Capital goods. Rule 44(1)(b) takes “the input tax credit involved in the remaining useful life in months”, on a pro rata basis, “taking the useful life as five years”. The rule’s illustration treats goods used for 4 years, 6 months and 15 days as having 5 months of life left, “ignoring a part of the month”. The amount payable is the credit multiplied by 5/60. The form’s footnote, substituted by Notification No. 21/2018-Central Tax, makes the same point for value: “reduced by 1/60th per month or part thereof from the date of invoice”.

This is not the same method as ITC-01. There, rule 40(1)(a) cuts five percentage points for each quarter or part quarter. Here, the cut is one-sixtieth for each month or part month.

Suppose a machine was bought on an invoice dated 15 June 2023 carrying Rs 1,20,000 of integrated tax, and the relevant day is 31 March 2027. The machine has been used for 3 years, 9 months and 16 days. Counting the part month as used, 46 of 60 months have gone and 14 remain. The amount payable is Rs 1,20,000 × 14/60, or Rs 28,000.

Separately by head. Rule 44(2) requires the amount to be worked out “separately for input tax credit of central tax, State tax, Union territory tax and integrated tax”.

No invoice. Under rule 44(3), where invoices for inputs in stock “are not available”, the amount is estimated on “the prevailing market price of the goods on the effective date”. Rule 44(5) requires those details to be “duly certified by a practicing chartered accountant or cost accountant”. No certificate is needed where every item is traced to an invoice.

What to have ready

• Stock statement as on the relevant day, split into inputs, inputs in semi-finished goods, inputs in finished goods, and capital goods. This comes from the books and a physical count.
• Purchase invoices and bills of entry, with the supplier’s GSTIN, or its registration under the old excise or VAT law for pre-GST stock. Each must show the credit actually taken. These come from the books.
• Capital goods register with invoice dates and credit taken, for the month count.
• Market price evidence and a practising accountant’s certificate for items without invoices.
• The trigger. For composition, the CMP-02 ARN and filing date, which the form asks for. For exemption, the notification and the date it takes effect.
• Ledger balances. The cash and credit ledgers on the portal, to see how the amount will be paid.

The form

FORM GST ITC-03 has these parts.

• Items 1 to 3: GSTIN, legal name and trade name.
• Item 4(a): the ARN and date of the composition application. Item 4(b): the date the exemption takes effect.
• Table 5: line-by-line stock. 5(a) is inputs in stock where an invoice is available, 5(b) is inputs in semi-finished and finished goods with invoices, 5© is capital goods with invoices, 5(d) is inputs without invoices, and 5(e) is capital goods without invoices.
• Table 6: the amount payable under each head, how it is paid (cash ledger or credit ledger), and the debit entry numbers.
• Item 7: verification by the authorised signatory.

Filing on the portal

The portal’s user manual for ITC-03 describes these steps.

1. After login, the filer goes to Services, then Returns, then ITC Forms, and chooses PREPARE ONLINE on the GST ITC-03 tile.
2. The filer selects “Section 18.4(a)” for composition or “Section 18.4(b)” for exemption.
3. A filer with nothing to reverse may file a Nil ITC-03. The FAQ allows this where there was no stock on the day before composition began, or where no credit was taken on the stock.
4. Otherwise, the filer enters the date of opting in and the ARN, or the date of exemption. The manual warns that changing that date later means closing the form, which deletes all saved data.
5. The filer completes the “Goods Details With Invoices” and “Goods Details Without Invoices” tiles. Above 500 records, the manual directs use of the upload facility.
6. Where items without invoices have been entered, the filer adds the certifying firm, accountant, membership number and certificate date, and uploads the certificate “in JPEG format with maximum size of 500 KB”.
7. In table 6, the portal suggests how to use the available credit, and the filer may change it. Any shortfall in the cash ledger is met by creating a challan.
8. The filer previews the summary and clicks MAKE PAYMENT. The manual is explicit that “you cannot make any changes” after this.
9. The filer clicks FILE RETURN, ticks the declaration, selects the authorised signatory and files with a DSC or EVC. The portal issues an ARN.

What happens to the rest of the credit

The proviso to section 18(4) states that “after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse”. The portal’s FAQ describes the lapse only for opting into composition. The proviso in the Act is not limited to that case.

The order of steps therefore matters. Under section 18(4), the amount may be paid from the credit ledger, and the lapse follows the payment.

Who signs

The authorised signatory verifies the form. Under rule 26(1), a company registered under the Companies Act, 2013 must use a DSC. The FAQ repeats this for a Nil filing.

If ITC-03 is not filed

Neither section 18(4) nor rule 44 has its own penalty or late fee. The consequences come from elsewhere.

• Unpaid liability. Rule 44(4) makes the amount “part of the output tax liability”. If it is unpaid, it is recoverable through section 73, 74 or 74A, with interest under section 50(1) from when it fell due. GST Notices: DRC-01A, DRC-01 and Sections 73, 74 and 74A describes that procedure.
• The composition option. Rule 6(4) allows the officer to issue a notice in FORM GST CMP-05 where the person “has contravened the provisions of the Act or provisions of this Chapter”. Rule 3(3), which requires ITC-03, is in that Chapter. On the text, a failure to file ITC-03 is a ground on which the option can be questioned.
• No change after payment. The portal does not allow ITC-03 to be changed after MAKE PAYMENT. An amount found short later can be paid separately through FORM GST DRC-03, with interest. Correcting Mistakes in Returns and Late Returns: Late Fee, Interest, the Three-Year Bar and Notices cover the mechanics.

The procedure in summary

1. Confirm the trigger: an option for composition in CMP-02, or all supplies becoming exempt. Partial exemption goes to rules 42 and 43, and cancellation to GSTR-10.
2. Take stock on the day before the option or exemption, split into inputs, inputs in semi-finished and finished goods, and capital goods.
3. Match inputs to invoices, and estimate at market price, with a practising accountant’s certificate, where invoices are missing.
4. For capital goods, compute the credit for the remaining months of a sixty-month life, counting part months as used, separately for each tax head.
5. For composition, file ITC-03 within sixty days from the start of the financial year. For exemption, no period is prescribed, but the liability runs from the day before the exemption.
6. Choose cash or credit for each head, pay, and file with a DSC (mandatory for companies) or EVC.
7. After payment, the remaining credit ledger balance lapses under the proviso to section 18(4).

The next guide in this set covers goods sent for job work, and the half-yearly or annual statement in FORM GST ITC-04.