Confirm the change that opens the claim
Section 18(1)(d) of the CGST Act, 2017 applies where an exempt supply of a registered person becomes taxable. It covers inputs in stock and inputs contained in semi-finished or finished goods held in stock that relate to that supply, and capital goods exclusively used for that exempt supply. Take the snapshot on the day immediately before the supply becomes taxable. Do not use this route solely because a taxable product’s rate changed or because a GSTIN was newly registered.
Read the applicable text: India Code: CGST Act, sections 16 and 18 CGST Rules, 2017: Rule 40 GSTN: taxpayer welcome kit and ITC-01 filing guidance.
Build the stock and asset populations independently
Retain the instrument changing the supply’s treatment and verify the effective date and scope for the actual product or service. Capture lot, quantities, GSTIN, supplier invoice, tax heads and traceable input contents of semi-finished and finished stock. Keep goods sold before the snapshot and stock unrelated to the newly taxable supply out. For capital goods, verify exclusive use for that exempt supply; separately assess common assets under the relevant rules rather than applying the special credit to every item in the asset register.
Apply the invoice-age screen and the capital-goods reduction
Section 18(2) bars the special credit after one year from the date of issue of the relevant tax invoice. Record invoice and claim timing independently of the stock snapshot. Under Rule 40(1)(a), reduce tax on qualifying capital goods by five percentage points for each quarter of a year or part thereof from the invoice or other applicable document date. This is a reduction from the original tax amount and does not replace the statutory invoice-age or eligibility checks.
Complete and support Form GST ITC-01
Rule 40(1)(b) prescribes electronic declaration within 30 days from becoming eligible, subject to a notified extension where applicable. Rule 40(1)(d) requires certification by a practising chartered accountant or cost accountant when the aggregate claim on account of central, State, Union territory and integrated tax exceeds ₹2 lakh. Under Rule 40(1)(e), verify the credit against the supplier’s corresponding details on the common portal in Form GSTR-1 or, as applicable, Form GSTR-4. Preserve the invoice and allocation trail. Do not treat successful upload as proof that every listed item qualifies.
Reconcile the claim to the ledger without duplication
Compare the filed declaration and actual credit ledger with the approved working. Resolve old ineligible invoices, prior credits, depreciation on the tax component where relevant and separate eligibility restrictions before claim. Document both excluded and included items so a later annual review can reproduce the cut-off and verify that the same credit was not taken through another route.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Stock held on the preceding day
A supply becomes taxable on 1 October 2026. On 30 September, 180 identical units from an eligible invoice of 300 units remain in stock; GST on the invoice was ₹30,000. The eligible attributable stock amount is ₹18,000 on the assumptions, not the original ₹30,000.
Illustrative example 2: Inputs embedded in work in progress
Eligible traced inputs contribute ₹12,000 GST in raw stock and ₹9,000 in semi-finished stock. Another ₹7,000 relates to goods already sold. The supported snapshot amount is ₹21,000, before other eligibility checks.
Illustrative example 3: Capital goods and one part-quarter
An exclusively used qualifying asset carries ₹80,000 input tax. Assume the elapsed time from invoice to eligibility is one full quarter plus part of the next and the invoice-age and other checks are met. Reduction is 10% of original tax or ₹8,000; the candidate credit is ₹72,000.
Illustrative example 4: Compare the two clocks
A qualifying supply becomes taxable on 1 October 2026 and the proposed claim is on 15 October 2026. The claim date is 14 calendar days after eligibility. A stock invoice dated 1 September 2025 is 409 calendar days old at claim, so its ₹16,000 is excluded even though the declaration timing is otherwise within 30 days.
Illustrative example 5: Certification trigger is aggregate
Central and State tax components of ₹90,000 each plus ₹25,000 IGST total ₹2,05,000. The aggregate exceeds ₹2 lakh by ₹5,000, so Rule 40(1)(d) certification is required.
Illustrative example 6: Remove common assets from this claim
The draft comprises ₹1,20,000 eligible inputs, ₹48,000 qualifying reduced capital-goods credit and ₹30,000 attributed to a common-use asset that does not satisfy this exclusive-use branch. The supported section 18(1)(d) total is ₹1,68,000; review the common asset separately.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the legal change | Applicable notification or statutory text |
| 2 | Fix the day-before snapshot | Effective date and stock close |
| 3 | Classify stock linked to the supply | Stock count and item trace |
| 4 | Prove input contents in finished items | Bill of materials and purchase trace |
| 5 | Check capital goods exclusive use | Asset register and usage records |
| 6 | Check each invoice age | Invoice and proposed filing date |
| 7 | Calculate capital reductions separately | Rule 40 elapsed-quarter working |
| 8 | Check supplier data and prior credit | Invoice match and ledger history |
| 9 | Prepare and certify where needed | ITC-01 and aggregate tax working |
| 10 | Reconcile filed claim and credit ledger | Acknowledgement and post-filing review |
Sixteen practitioner FAQs
1. Does a rate increase on an already taxable supply trigger section 18(1)(d)?
No. The clause requires a change from exempt to taxable.
2. Which stock date applies?
The day immediately preceding the date the supply becomes taxable.
3. Can inputs embedded in finished goods be included?
Yes where eligible, held in stock and relatable to the affected supply; substantiate the input component.
4. Can a batch sold before the change remain in the snapshot?
No. Use stock actually held at the statutory cut-off.
5. Can the company include all capital goods at that GSTIN?
No. This clause requires exclusive use for the affected exempt supply.
6. What if one machine was used for taxable and exempt activity?
Assess the applicable common-credit rules separately.
7. Does the capital goods reduction use five percentage points only for full quarters?
No. Rule 40 also counts a part of a quarter.
8. Can the five-year capital-use framework override section 18(2)?
Do not use a capital computation to bypass the invoice-age condition for this special claim.
9. Is ITC-01 the periodic GSTR-3B return?
No. It is the prescribed special declaration.
10. What is the normal ITC-01 filing window?
Thirty days from eligibility, subject to a notified extension where applicable.
11. Does the certification threshold apply to each tax head separately?
No. Apply it to the aggregate specified in Rule 40(1)(d).
12. Does exactly ₹2 lakh trigger certification under that clause?
No. The rule uses exceeds ₹2 lakh.
13. Can purchase tax already credited be claimed again?
No. Reconcile previous credit and remove duplicate amounts.
14. Does an asset depreciation working matter?
Check the tax component separately under the applicable credit rules and reconcile prior treatment.
15. Do we have to verify supplier reporting?
Yes. Rule 40(1)(e) requires verification against the supplier’s corresponding details in GSTR-1 or GSTR-4, as applicable.
16. What should a later reviewer be able to trace?
The legal trigger, exact snapshot, invoice-age review, tax amounts and the filed-to-ledger reconciliation.
Official sources
India Code: CGST Act, sections 16 and 18 CGST Rules, 2017: Rule 40 GSTN: taxpayer welcome kit and ITC-01 filing guidance