Entering and Exiting Composition: ITC-03 In, ITC-01 Out

Entering and Exiting Composition 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.

The composition scheme is a credit-free zone, so the boundary has to be policed in both directions. Walk in and you pay back the credit sitting in your stock. Walk out and you claim credit on the stock you are carrying. The two computations are not mirror images, and the difference costs money.

On entry, s.18(4) requires an amount equal to the credit on inputs in stock, inputs in semi-finished and finished goods, and capital goods to be paid by debiting the credit or cash ledger, computed under Rule 44, declared in FORM GST ITC-03 within sixty days of the start of the year — and the balance of credit then lapses. On exit, s.18(1)(c) gives credit back on the same three categories, computed under Rule 40, declared in FORM GST ITC-01 within thirty days.

Entry: section 18(4) and the lapse proviso

"Where any registered person who has availed of input tax credit opts to pay tax under section 10… he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option… Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse."

The proviso is the part that hurts. Reversal alone would be neutral — you give back what relates to stock you still hold. But whatever credit remains after the reversal simply lapses. There is no carry-forward, no refund, and nothing to reclaim on the way out.

So a trader sitting on a large accumulated credit balance loses all of it on 1 April. That, not the 1% rate, is usually the deciding number in the decision to opt in.

Rule 44: how the entry reversal is computed

Rule 44(1)(a) — inputs. "the input tax credit shall be calculated proportionately on the basis of the corresponding invoices on which credit had been availed". Invoice-based, not estimated.

Rule 44(1)(b) — capital goods. The credit "involved in the remaining useful life in months" is computed pro rata, taking the useful life as five years. The rule carries its own illustration: capital goods in use for 4 years, 6 months and 15 days leave a remaining useful life of 5 months, ignoring part of a month, so the amount is C × 5/60, where C is the credit taken.

Rule 44(2) — head by head. The amount is determined separately for central tax, State tax, Union territory tax and integrated tax.

Rule 44(3) — where invoices are missing. The person estimates the amount on the prevailing market price of the goods on the effective date, and Rule 44(5) requires those estimated details to be certified by a practising chartered accountant or cost accountant.

Rule 44(4) — the form. The amount "shall form part of the output tax liability" and is furnished in FORM GST ITC-03 where it relates to s.18(4), and in FORM GSTR-10 where it relates to cancellation of registration.

And ITC-03 is due within sixty days of the start of the year under Rule 3(3), so an option effective 1 April carries an ITC-03 due by 30 May. Rule 3 and Rule 4 →

Exit: section 18(1)(c) and Rule 40

"where any registered person ceases to pay tax under section 10, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9: Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed."

Rule 40(1)(a) prescribes the reduction: credit on capital goods is claimed after reducing the tax paid on them by five percentage points per quarter of a year or part thereof from the date of the invoice.

Rule 40(1)(b) — the declaration in FORM GST ITC-01 is made within thirty days of becoming eligible, or such further period as the Commissioner notifies.

Rule 40(1)(c)(iii) — the declaration specifies the stock on the day immediately preceding the date from which the person becomes liable to pay tax under s.9.

Rule 40(1)(d) — certification by a practising chartered accountant or cost accountant where the aggregate claim across CGST, SGST, UTGST and IGST exceeds two lakh rupees.

Rule 40(1)(e) — the claim is verified against the supplier's GSTR-1, and GSTR-1A where filed. So credit on stock bought from a supplier who never reported the invoice will not survive verification.

And Rule 6(6) gives the same right on all three exit routes — voluntary withdrawal under Rule 6(3), automatic failure under Rule 6(2), and denial by CMP-07 under Rule 6(5). Rule 6 and the CMP-04 chain →

Where the two computations diverge

Two of these differences do real damage.

The capital goods methods are not equivalent. Entry uses months of remaining life out of sixty; exit uses five points per quarter from the invoice date. Over a full quarter the two roughly track, but they are computed on different denominators and neither is the inverse of the other. A machine that goes in and comes out does not come back whole.

And the one-year bar has no counterpart on entry. Section 18(2) blocks credit on any invoice more than a year old. Slow-moving stock bought two years ago is reversed in full on the way in and recovered as nothing on the way out.

The pipeline problem on entry

The Explanation to Rule 62(4) independently provides that a person opting into composition from the start of a year "shall not be eligible to avail input tax credit on receipt of invoices or debit notes from the supplier for the period prior to his opting for the composition scheme".

So three things close at once on 1 April. Credit on stock is reversed by ITC-03. The remaining ledger balance lapses. And credit on invoices still in transit for the pre-entry period is barred, even though the old GSTR-1 and GSTR-3B for that period may still be pending under Rule 62(4). Rule 62 returns →

Which makes the timing of entry a real decision. The right moment is low stock, low capital goods with life remaining, a small credit balance and no invoice pipeline — and that combination does not occur by accident.

Key takeaways

• Entry: s.18(4) reversal on inputs, stock and capital goods, computed under Rule 44, declared in ITC-03 within sixty days.
• The proviso to s.18(4) makes the remaining credit balance lapse — this is usually the largest single cost of opting in.
• Rule 44(1)(b) uses remaining useful life out of five years; its own illustration is C × 5/60.
• Exit: s.18(1)(c) credit on the same three categories, capital goods reduced by 5% per quarter under Rule 40(1)(a), declared in ITC-01 within thirty days.
• A CA or CMA certificate is required for an estimated entry figure under Rule 44(5), and for an exit claim above ₹2 lakh under Rule 40(1)(d).
• Section 18(2) bars exit credit on invoices older than one year; there is no such relief on entry.

Read next

• Rule 3 and Rule 4: Which CMP Form, and When the Option Starts
• Rule 6: Lapse, Withdrawal and the CMP-04 to CMP-07 Chain
• Rule 62: CMP-08 by the 18th, GSTR-4 by 30 June
• Rule 7 Rate Table, Column by Column

Disclaimer: Positions stated as on 5 September 2026, based on section 18 of the CGST Act, 2017 and Rules 3, 6, 40, 44 and 62 of the CGST Rules, 2017 as recorded in the ICAI Bare Law (12th edition, amended to 31 March 2026), and the ICAI Handbook on Composition Scheme under GST (February 2026, 3rd edition).