Section 18(4) of the Central Goods and Services Tax (CGST) Act, 2017 deals with the reversal of input tax credit (ITC)

 Section 18(4) of the Central Goods and Services Tax (CGST) Act, 2017 deals with the reversal of input tax credit (ITC) when a registered person switches from regular scheme (taxable supply under Section 9) to the composition scheme (under Section 10), or when they become exempt from payment of tax.

✅ CGST Act – Section 18(4) – Summary:

Section 18(4):
Where any registered person who has availed input tax credit opts to pay tax under Section 10 (Composition Scheme) or, where the goods or services become wholly exempt, then such 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 in respect of:

  • Inputs held in stock, and

  • Inputs contained in semi-finished or finished goods, and

  • Capital goods (reduced by prescribed percentage),
    on the day immediately preceding the date of such switch (composition/exemption).

After payment of such amount, the balance of input tax credit, if any, lying in the credit ledger shall lapse.

📘 Breakdown with Example:

Let’s say a taxpayer was under the regular GST scheme and had availed ITC on purchases. If on 1st October, they opt for the composition scheme, then:

  • They must calculate the ITC on closing stock (inputs, semi-finished, finished goods) and capital goods as of 30th September.

  • That ITC amount must be paid back (reversed).

  • Remaining ITC balance will lapse (cannot be carried forward).

🔧 Relevant Rules:

Rule 44 of CGST Rules, 2017 provides the method of calculation of the amount payable under Section 18(4). It includes:

  • Proportionate reversal of credit on capital goods (based on 5% per quarter of use).

  • Use of stock records to determine ITC on inputs.

  • Requirement to file Form GST ITC-03 within 60 days from the date of switch or exemption.

📄 Form to be Filed:

  • Form GST ITC-03 – Intimation of reversal of ITC under Section 18(4).

  • Time limit: Within 60 days of becoming liable.

🚫 When Does Section 18(4) Trigger?

  1. Switching to composition scheme under Section 10.

  2. Supply of goods/services becomes wholly exempt.

📝 Important Notes:

  • This provision ensures that ITC is not unduly retained by someone not liable to pay output tax.

  • If you resume making taxable supplies later, you can re-avail ITC under Section 18(1)(c), subject to conditions.


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