Switching From Regular GST to Composition Scheme: ITC Reversal and Timing
Moving from regular GST to the Composition Scheme is not just a form filing — it requires reversing input tax credit already claimed on stock and capital goods sitting in the business, within a strict 60-day window that catches many small businesses off guard.
Step 1: File Form GST CMP-02
A registered person eligible for composition must file Form GST CMP-02 on the GST portal, intimating the decision to opt for the scheme, before the start of the financial year for which the option is to apply. This is a declaration, not an approval-based application — but it starts the clock on the next, more consequential step.
Step 2: Reverse ITC using Form GST ITC-03 — within 60 days
Because composition dealers cannot hold input tax credit, anyone switching from regular registration must reverse the ITC already availed on:
- Inputs held in stock (raw materials, trading goods) as on the day before the composition scheme becomes effective.
- Inputs contained in semi-finished and finished goods held in stock on that date.
- Capital goods — here the reversal is not the full original credit, but a proportionate amount, calculated on a straight-line basis assuming the useful life of capital goods is 5 years (i.e., the credit is reduced by 5% per quarter, or part thereof, from the date of invoice).
This reversal is filed through Form GST ITC-03, and must be completed within 60 days from the commencement of the relevant financial year (i.e., the date the composition scheme becomes effective).
How the capital goods reversal is calculated
The credit attributable to the remaining useful life of a capital good (assumed as 60 months / 5 years from the invoice date) is what must be reversed. In practical terms: take the original ITC claimed on the capital good, subtract 5% for every quarter (or part of a quarter) already elapsed since the invoice date, and reverse the remaining balance.
What stays the same
Existing balances in the electronic cash ledger are not affected by the switch. GST already paid and returns already filed for the regular-registration period remain valid — the reversal only concerns the ITC embedded in stock and capital goods that will now be used to make composition-scheme (ITC-ineligible) supplies going forward.
Switching back to regular registration later
The reverse move — from composition back to regular — is more favourable: on withdrawal from composition (voluntary or forced by crossing the threshold), the taxpayer is entitled to claim ITC on stock held on the day immediately preceding the date from which regular tax liability applies, by filing Form GST ITC-01, subject to the usual credit-eligibility conditions and time limits.