Library / Goods and Services Tax: The Professional's Master Guide

18. Special Cases of Input Tax Credit (Sections 18, 19, 20 and 143)

This chapter covers credit outside the normal monthly cycle: new registration, leaving composition, change in constitution, job work, head office distribution, and some recurring practical cases.

18.1 New registration and exempt goods becoming taxable: section 18(1)

Section 18(1) allows credit on stock held on the day before a person enters the taxable net.

Clause	Situation	Credit on	Relevant day
18(1)(a)	Person applies for registration within 30 days of becoming liable and gets it	Inputs in stock, in semi-finished and in finished goods	Day before he became liable to pay tax
18(1)(b)	Voluntary registration under section 25(3)	Inputs in stock, in semi-finished and in finished goods	Day before grant of registration
18(1)(c)	Composition taxpayer becomes liable under section 9	Inputs as above and capital goods	Day before he becomes liable under section 9
18(1)(d)	Exempt supply becomes taxable	Inputs as above and capital goods used exclusively for the exempt supply	Day before the supply becomes taxable

Under section 18(2), no credit is available after one year from the invoice date. The claim is filed in form GST ITC-01 within 30 days of becoming eligible (rule 40), with a chartered accountant's or cost accountant's certificate if it exceeds Rs. 2 lakh. For capital goods under clauses (c) and (d), credit is reduced by 5 percentage points per quarter or part quarter from the invoice date.

Illustration 109: Moving out of composition

Dev Furnishings, a composition dealer, crosses Rs. 1.5 crore and becomes liable to pay tax under section 9 from 1 September 2026. Stock and assets on 31 August 2026:

Step 1: Inputs in stock with invoices dated after 31 August 2025: credit Rs. 60,000. Eligible.

Step 2: Inputs with an invoice dated 1 July 2025: credit Rs. 8,000. Not eligible: more than one year from the invoice date.

Step 3: Showroom racks and a billing system bought on 20 October 2025, credit Rs. 1,00,000. Quarters or part quarters from 20 October 2025 to 31 August 2026 = 4. Reduction 20 percentage points. Eligible = Rs. 80,000.

Result: ITC-01 claim = Rs. 60,000 + Rs. 80,000 = Rs. 1,40,000, filed within 30 days. No certificate is needed as the claim is below Rs. 2 lakh.

18.2 Change in constitution, merger, demerger and sale of business: section 18(3) and rule 41

Where a business is sold, merged, demerged, amalgamated, leased or transferred with provision for transfer of liabilities, the unused credit moves to the transferee. The transferor files form GST ITC-02 with a professional's certificate, and the transferee accepts it on the portal (rule 41). In a demerger, credit is split in the ratio of the value of assets of the new units in the scheme, taking the entire assets whether or not credit was taken on them.

Illustration 110: Credit transfer on demerger

Bharat Cables Ltd., Gujarat, demerges its wire harness unit into Bharat Harness Ltd. under a scheme approved by the NCLT. Unused credit in Bharat Cables' Gujarat registration is Rs. 45,00,000.

Step 1: Value of assets of the demerged unit as per the scheme Rs. 30 crore; value of assets remaining with Bharat Cables Rs. 70 crore. Ratio 30:70.

Step 2: Credit transferable = Rs. 45,00,000 x 30% = Rs. 13,50,000.

Result: Bharat Cables files ITC-02 for Rs. 13,50,000, and Bharat Harness accepts it in its Gujarat registration. Credit in other States moves State by State.

18.3 Job work: sections 19 and 143

A principal may send inputs and capital goods to a job worker without tax and keep the credit, and inputs may go directly from the supplier to the job worker. Inputs must return within one year and capital goods within three years (moulds, dies, jigs, fixtures and tools excluded), counted from dispatch or from receipt by the job worker for direct supplies. Otherwise they are deemed supplied by the principal on the day they were sent out. The tax belongs to the return for that month, so interest runs from the day after its due date. Form GST ITC-04 is filed half-yearly (25 October and 25 April) if aggregate turnover exceeds Rs. 5 crore, and annually (25 April) for others.

Illustration 111: Inputs not returned within one year

Ranade Castings, Kolhapur, sends aluminium ingots worth Rs. 4,00,000 to a job worker on 10 June 2025 under a delivery challan. The finished castings have not come back by 9 June 2026.

Step 1: Deemed supply on 10 June 2025. Tax at 18% = Rs. 72,000 (CGST Rs. 36,000 + SGST Rs. 36,000).

Step 2: Tax was due with the June 2025 GSTR-3B on 20 July 2025. Ranade pays on 20 July 2026: 365 days late.

Step 3: Interest = Rs. 72,000 x 18% x 365 / 365 = Rs. 12,960.

Result: Total payment Rs. 84,960, supported by an invoice for the deemed supply.

18.4 Input Service Distributor: section 20 and rule 39

Common services received at a head office (audit, advertising, software, legal advice) are used by all State registrations. The Input Service Distributor (ISD) moves the credit to them. The Finance Act, 2024 amended sections 2(61) and 20 to make ISD registration mandatory from 1 April 2025 for common third-party input services, including tax paid under reverse charge, and the Finance Act, 2025 added IGST paid under reverse charge (sections 5(3) and 5(4) of the IGST Act). Reverse charge is paid by the normal registration, which passes the credit to the ISD by issuing an invoice under rule 39(1A).

Under rule 39, credit is distributed in the month it is available. Credit for a specific branch goes only to it; common credit goes to the operational branches concerned in the ratio of their State turnover for the relevant period (normally the preceding year). CGST and SGST go as CGST and SGST to a branch in the ISD's State and as IGST to other States; IGST goes as IGST. The ISD issues ISD invoices and files GSTR-6 by the 13th.

Illustration 112: ISD with three State registrations

Kaveri Foods Ltd. has its ISD registration in Mumbai and units in Gujarat, Karnataka and Maharashtra. Turnover in FY 2025-26: Gujarat Rs. 6 crore, Karnataka Rs. 3 crore, Maharashtra Rs. 1 crore (ratio 60:30:10). Common services in October 2026:

Step 1: Statutory audit by a Mumbai firm: CGST Rs. 90,000 + SGST Rs. 90,000. Advertising by a Delhi agency: IGST Rs. 90,000. Legal fees under reverse charge paid by the Mumbai normal registration: CGST Rs. 18,000 + SGST Rs. 18,000. Total credit = Rs. 3,06,000.

Step 2: Gujarat (60%): Rs. 1,83,600, all as IGST.

Step 3: Karnataka (30%): Rs. 91,800, all as IGST.

Step 4: Maharashtra (10%): CGST 10% of Rs. 1,08,000 = Rs. 10,800; SGST Rs. 10,800; IGST 10% of Rs. 90,000 = Rs. 9,000. Total Rs. 30,600.

Result: Total distributed = Rs. 1,83,600 + Rs. 91,800 + Rs. 30,600 = Rs. 3,06,000. ISD invoices are issued in October 2026 and GSTR-6 is filed by 13 November 2026.

ISD versus cross charge

Cross charge is a taxable supply between distinct persons under Schedule I. CBIC Circular 199/11/2023-GST allowed third-party common services to be distributed by ISD or cross charged, and accepted the invoice value (even nil for employee costs) as open market value where the branch gets full credit. Since 2025, third-party common services must go through ISD; cross charge remains for the head office's own services.

18.5 Credit on zero-rated supplies

Section 16 of the IGST Act allows credit for zero-rated supplies. The exporter exports under a Letter of Undertaking and claims refund of unutilised credit, or pays IGST and claims its refund (Part F).

Judicial view: Refund of accumulated credit

Union of India v. VKC Footsteps India (P) Ltd. (Supreme Court, 2021): The Court upheld the formula in rule 89(5) for refund of unutilised credit under the inverted duty structure and held that section 54(3) permits refund only of credit on inputs, not on input services. For exports under a Letter of Undertaking, section 54(3)(i) covers credit on inputs and input services, which is why credit planning differs between exporters and domestic manufacturers with inverted rates.

18.6 Fire, warranty and promotional items

Goods destroyed in fire. Credit on inputs and inputs in finished goods destroyed must be reversed under section 17(5)(h) whether or not insurance is received (see the flood illustration in chapter 2). For destroyed capital goods, the department applies clause (h) too, and a common practice is to reverse credit for the remaining useful life. The point is not settled; record the basis in the working papers.

Warranty replacements. CBIC Circular 195/07/2023-GST clarified that free replacement of parts or goods under warranty attracts no GST and needs no credit reversal, including where a distributor replaces from its own stock and is replenished free. If the distributor charges the manufacturer, that is a taxable supply, as is an extended warranty sold separately.

Illustration 113: Warranty and extended warranty

Sunshine Appliances sells an air conditioner for Rs. 40,000 plus 18% (Rs. 7,200) with a one-year warranty. In the eighth month the compressor fails.

Step 1: The authorised dealer replaces the compressor from Sunshine's stock free of charge. No GST on the replacement; Sunshine keeps the credit on the compressor.

Step 2: The customer buys a two-year extended warranty for Rs. 5,000. GST at 18% = Rs. 900 is payable on it.

Result: Output tax on the extended warranty Rs. 900; no reversal on the warranty part.

Promotional items. Free gifts and samples are blocked (section 17(5)(h)). Items forming part of one priced supply, such as buy-one-get-one, carry full credit (Circular 92/11/2019-GST). Display stands and similar assets lent to dealers remain business assets.

Chapter summary

• Section 18(1) gives credit on opening stock on new or voluntary registration, and on stock and capital goods when leaving composition or when an exempt supply becomes taxable; claim through ITC-01 within 30 days and within one year of the invoice.

• On merger, demerger or sale of business, unused credit is transferred through ITC-02; in a demerger it is split in the ratio of asset values in the scheme.

• Inputs must return from job work within one year and capital goods within three years, failing which they are deemed supplied on the date of dispatch and tax is payable with interest.

• ISD registration is mandatory from 1 April 2025 for distributing common third-party input service credit, including reverse charge tax, in the ratio of State turnover.

• Warranty replacements without charge need no reversal; extended warranties are taxable; gifts and free samples remain blocked.