Section 18(4): Reversal on Opting Into Composition or Exemption

Section 18 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Credit is taken on the assumption that the output will be taxable. When that assumption changes — the business opts into composition, or its output becomes exempt — the credit sitting in stock and assets has to go back.

Section 18(4) is the mirror image of s.18(1), and it uses the same arithmetic in reverse.

Where a registered person who has availed credit opts to pay tax under s.10, or where the goods or services supplied by him become wholly exempt, he shall pay an amount, by debit in the electronic credit ledger or the electronic cash ledger, equivalent to the credit in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock, and capital goods, on the day immediately preceding the date of exercising the option or the date of exemption. Any balance in the electronic credit ledger after such payment lapses. Rule 44 supplies the computation and FORM GST ITC-03 the declaration.

The trigger dates

Opting for composition — the day immediately preceding the date of exercising the option. Since a composition option under Rule 3 is exercised for a financial year by filing CMP-02 before the beginning of that year, the relevant date is generally 31 March.

Supplies becoming wholly exempt — the day immediately preceding the date of such exemption. That is the date the exemption notification takes effect, which can fall mid-month.

Rule 44: two different computations

Inputs held in stock, and inputs contained in semi-finished or finished goods. Rule 44(2): the amount is calculated proportionately on the basis of the corresponding invoices on which credit was availed.

Where the invoices are not available, Rule 44(3) permits the amount to be estimated on the basis of the prevailing market price of the goods on the relevant date, and that estimate must be certified by a practising chartered accountant or cost accountant.

Capital goods. Rule 44(1)(b): the amount is calculated by taking the useful life as five years, and reversing the credit pro rata for the remaining useful life in months.

So a machine bought 30 months ago has 30 months of useful life left, and 30/60 = 50% of its credit is reversed.

Worked example

A trader opting into composition from 1 April 2027.

Stock as on 31 March 2027:

Capital goods:

Total reversal: ₹2,34,000 + ₹2,70,000 = ₹5,04,000, paid by debit in the credit ledger or, if insufficient, the cash ledger.

Any balance remaining in the electronic credit ledger after that payment lapses.

The lapse is the sting

Section 18(4) closes: "Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse."

So a business carrying a large unutilised credit balance into composition loses all of it, not just the portion attributable to stock and assets.

This is the single strongest argument against opting into composition for a business with accumulated credit, and it should be quantified before the CMP-02 is filed. The credit is not refundable, not carried forward, and not recoverable if the business later opts out.

FORM GST ITC-03

Rule 44(4): the amount determined shall form part of the output tax liability of the registered person, and the details shall be furnished in FORM GST ITC-03, where the credit relates to a case under s.18(4).

Rule 44(5): the details furnished in ITC-03 shall be duly certified by a practising chartered accountant or cost accountant.

Note the difference from ITC-01: the certificate for ITC-03 is required in all cases, with no ₹2 lakh threshold.

Timing: ITC-03 is filed within sixty days from the commencement of the relevant financial year where the person opts for composition, and within the period prescribed for the exemption case.

The related case: section 29(5) on cancellation

Where a registration is cancelled, s.29(5) requires the same kind of payment — an amount equivalent to the credit on inputs in stock, inputs in semi-finished and finished goods, and capital goods, or the output tax payable on such goods, whichever is higher.

Note the difference: s.29(5) takes the higher of the credit reversal and the output tax; s.18(4) takes the credit amount only. And for capital goods on cancellation, Rule 44(6) takes the higher of the pro-rata reversal and the tax on the transaction value.

Practical notes

• Quantify before you elect. For composition, model the lapse of the credit balance against the composition rate benefit.
• Take a physical stock count at the relevant date. The reversal is on actual holdings.
• Match stock to invoices wherever possible — the market-price estimate route needs a certificate and invites scrutiny.
• Build a capital goods schedule with invoice dates and month counts.
• File ITC-03 with the certificate — it is mandatory, not threshold-based.
• Where a supply becomes exempt mid-year, the relevant date is the notification's effective date, not the year end.

Key takeaways

• s.18(4) requires reversal on opting into composition or where supplies become wholly exempt.
• Covers inputs in stock, inputs in semi-finished and finished goods, and capital goods.
• Stock is reversed on the corresponding invoices; capital goods pro rata over sixty months.
• Where invoices are unavailable, a market-price estimate certified by a CA or CMA is permitted.
• Any remaining credit ledger balance lapses.
• FORM GST ITC-03, with a mandatory CA or CMA certificate.

Read next

• Section 18(1): Claiming ITC on Stock When You Register
• Composition Scheme vs Regular GST: Which Is Better
• Section 18 CGST: ITC in Special Circumstances
• Cancellation of GST Registration

Disclaimer: Positions stated as on 5 September 2026, based on the CGST Act and Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition).