Composition entry requires a credit exit working, not just CMP-02
An existing registered person moving to section 10 composition after having availed ITC must address section 18(4) and rule 44. Identify inputs remaining in stock, inputs contained in semi-finished/finished stock and capital goods; compute the prescribed credit amount, discharge it through the permitted ledger route, and recognise the lapse of any remaining electronic credit-ledger balance. Form GST CMP-02 communicates the composition option; Form GST ITC-03 reports the credit/payment working. One does not replace the other.
This guide, checked on 23 October 2026, assumes section 10 eligibility has already been established for the relevant person and registrations. It focuses on composition-entry credit, rather than general turnover eligibility, cancellation or the economic comparison with regular taxation. The framework is section 18(4), rules 3(3), 3(5), 4 and 44 in the 2026 GST bare-law compilation.
Fix the effective transition and the stock population
For the ordinary existing-taxpayer route under rule 3(3), CMP-02 is filed before commencement of the financial year for which composition is selected, and ITC-03 is furnished within sixty days from commencement of that relevant financial year. Rule 4 connects that route to the beginning of the financial year. Establish the effective transition and the immediately preceding stock position; do not use the later date on which an accountant happens to prepare the statement.
Maintain the applicable deadline and check any valid period-specific extension. Historical 2017/2018 transition rules and the special 2020–21 relaxation reproduced in older materials are not the ordinary current sixty-day rule. Also review the same-PAN effect of rule 3(5) across registrations; choosing one branch in a software dropdown does not independently establish that other registrations can remain outside the applicable composition election.
Inputs use invoice-linked credit; capital goods use remaining months
| Population | Calculation basis | Key evidence |
|---|---|---|
| Inputs held in stock | Proportionate ITC from corresponding invoices on which credit was availed | Invoice credit, quantities acquired and quantities remaining |
| Inputs in semi-finished/finished goods | Identify the input content and related availed credit; do not tax the entire selling price as the reversal base | BOM/production records, input allocation and stock reconciliation |
| Capital goods | Credit attributable to remaining useful life in months, taking prescribed life as five years | Original ITC, in-use history and remaining-month working |
| Input invoices unavailable | Rule 44(3) market-price estimation with rule 44(5) certification | Contemporaneous valuation support and practising CA/cost-accountant certification |
| Ledger discharge and lapse | Discharge the determined amount and then identify any residual credit that lapses | Tax-head liability, permitted utilisation, cash requirement and actual ledger debits |
For inputs, tie the computation to credit actually availed on the relevant goods. A stock value alone does not establish that ITC was claimed, and goods purchased without any availed credit should not be assigned a fictional invoice credit. Match returns, consumption and stock transfers to avoid counting the same input both as raw stock and as embedded stock.
For capital goods, rule 44 uses a five-year life and a pro-rata remaining-month calculation. Its own illustration shows capital goods used for four years, six months and fifteen days leaving five months after ignoring the part-month, with the amount C × 5/60. Do not replace this transition method with accounting written-down value, current resale price or an unsupported annual percentage. Keep tax credit history separate from book depreciation.
Calculate the liability before looking at the credit balance
Section 18(4) permits debit in the electronic credit ledger or electronic cash ledger for the prescribed amount. A low credit-ledger balance does not cap the stock/capital calculation: where permitted available credit is insufficient, identify the cash needed to discharge the balance. Conversely, if credit exceeds the amount paid, the section’s proviso says the remaining credit balance lapses. The leftover amount is not automatically retained for composition-period utilisation or converted into a bank refund.
Rule 44 requires separate central, State/UT and integrated-tax workings. Any actual utilisation across heads must follow the applicable utilisation rules; a combined total is a control figure, not authority to offset any head against any other. The illustrations using a single available-credit figure expressly assume it is legally usable against the stated liability.
Distinguish ITC-03 from cancellation and a capital-goods sale
Rule 44(4) directs section 18(4) event details to ITC-03 and cancellation-related details to GSTR-10. The section 18(6) calculation for an actual capital-goods supply is another statutory event. Do not use its higher-of transaction-tax comparison merely because an asset is included in this composition-transition working. Nor does entering composition mean the physical capital goods were sold.
Reconcile the stock report, fixed-asset register, original credit records and filed form to actual ledger discharge. Keep any invoice-unavailable estimation separately identified and certified where rule 44(5) applies. A filed option without a complete credit-exit record can leave both a payment shortfall and an incorrect recoverable-GST asset in the accounts.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: Part of an invoice lot remains
Assume ITC of ₹18,000 was availed on 100 identical input units and thirty units remain in the relevant stock snapshot. Proportionate credit is ₹18,000 × 30/100 = ₹5,400. Use the evidenced original credit and remaining quantity, not the stock’s selling price.
Illustrative example 2: Separate raw, WIP and finished input content
Assume supported input-credit amounts are ₹12,000 for raw stock, ₹6,000 embedded in WIP and ₹9,000 embedded in finished goods, with no overlapping inputs. Total input-related amount is ₹27,000. The raw-plus-WIP subtotal is ₹18,000; do not add the same WIP inputs again as raw stock.
Illustrative example 3: Capital goods with twenty-four months remaining
Assume original availed ITC is ₹1,20,000 and the supported remaining useful life under rule 44 is 24 months out of sixty. The attributable amount is ₹1,20,000 × 24/60 = ₹48,000. This is a credit-life calculation, not book WDV.
Illustrative example 4: Apply the part-month treatment shown in the rule
Assume capital goods have been used for four years, six months and fifteen days, matching the duration pattern in rule 44’s illustration. Remaining life is five whole months after ignoring the part-month. On independently assumed original ITC of ₹1,08,000, the amount is ₹1,08,000 × 5/60 = ₹9,000; do not round the remaining life up to six months.
Illustrative example 5: Credit balance does not cap the amount payable
Assume input-related credit amount ₹27,000 and capital-goods amount ₹9,000: total ₹36,000. Only ₹20,000 credit is available and legally usable against that liability. Required additional cash is ₹16,000. Reporting only the available ₹20,000 would understate the calculated amount.
Illustrative example 6: A residual credit balance lapses
Assume the correctly calculated amount is ₹36,000 and ₹50,000 credit is available, with the full ₹36,000 legally discharged from it. The remaining ₹14,000 is subject to the section 18(4) lapse. Do not carry it as an ordinary composition-period credit or assume it becomes a bank refund.
Illustrative example 7: Keep tax heads distinct
Assume CGST input amount ₹4,000 plus capital-goods CGST ₹60,000 × 12/60 = ₹12,000: total CGST ₹16,000. SGST has the same figures: ₹16,000. IGST input amount ₹7,000 plus capital-goods IGST ₹30,000 × 6/60 = ₹3,000: total IGST ₹10,000. Aggregate amount is ₹42,000, but retain the three separate head workings for discharge.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Confirm composition eligibility and registration scope | Section 10 review and same-PAN registration list |
| 2 | Establish the effective transition | CMP-02 and relevant financial-year commencement |
| 3 | Diary the applicable ITC-03 period | Ordinary sixty-day rule and any actual period-specific extension |
| 4 | Freeze and reconcile the stock snapshot | Physical/ledger stock immediately before transition |
| 5 | Trace input credit to availed invoices | Lot quantities, returns, consumption and credit evidence |
| 6 | Calculate embedded input amounts | WIP/finished-goods records without duplication |
| 7 | Calculate capital-goods remaining credit | Original ITC and whole remaining-month schedule |
| 8 | Separate invoice-unavailable estimation | Market-price evidence and required professional certification |
| 9 | Plan legal ledger utilisation and cash | Tax-head liability and actual available usable balances |
| 10 | Verify filing, discharge and residual lapse | ITC-03, acknowledgements, ledger debits and accounting reconciliation |
Sixteen practitioner FAQs
1. Does CMP-02 by itself settle the credit exit?
No. It communicates the option. Compute and report the section 18(4)/rule 44 amount in the applicable ITC-03 process.
2. Does this article establish that the taxpayer is composition eligible?
No. Establish section 10 eligibility and registration scope first; this guide addresses the credit consequences of a valid transition.
3. Which stock date should be used?
Establish the effective transition and the immediately preceding stock position under the applicable route, rather than the statement-preparation date.
4. What is the ordinary existing-taxpayer ITC-03 period?
Rule 3(3) specifies sixty days from commencement of the relevant financial year. Check any valid period-specific extension and plan filing early.
5. Can an old ninety-day transitional instruction be reused automatically?
No. Identify the specific historical route and year to which it applied. It is not the ordinary rule 3(3) timing.
6. Do all goods in stock automatically carry a reversal amount?
Trace credit actually availed on the corresponding inputs. Do not invent credit where none was claimed.
7. Is finished-goods selling price the usual input-credit base?
No. Identify the embedded inputs and corresponding availed credit using supported production and invoice records.
8. How are capital goods measured for this transition?
Use the prescribed remaining useful life in months over a five-year life, linked to original availed credit.
9. Should a remaining part-month always be rounded up?
Rule 44’s own four-years-six-months-fifteen-days illustration ignores the part-month and uses five remaining months. Apply the prescribed method consistently.
10. Can accounting WDV replace the credit calculation?
No. Book depreciation and the rule 44 credit-life method are different workings.
11. What if the input invoices cannot be located?
Rule 44 provides a prevailing-market-price estimation route for the specified inputs, with practising CA or cost-accountant certification under sub-rule (5).
12. Is the amount limited to the available credit ledger?
No. Compute the statutory amount first. Identify legally usable credit and any cash shortfall separately.
13. Can excess credit be retained for the composition period?
Section 18(4) says the remaining electronic credit-ledger balance lapses after payment of the determined amount.
14. Can all tax heads be treated as interchangeable?
No. Rule 44 requires separate head calculations; actual utilisation must follow the applicable legal restrictions.
15. Is GSTR-10 the composition-entry statement?
Rule 44 distinguishes the forms: section 18(4) event details in ITC-03 and cancellation-related details in GSTR-10.
16. Should the capital-goods sale higher-of test be used here?
Do not substitute a different event’s test. Composition transition under section 18(4) and an actual supply under section 18(6) require their own analyses.
Conclusion
Treat composition entry as both an election and a credit-exit event. Reconcile the prescribed amount, actual payment and remaining credit lapse before closing the transition file.