Input Tax Credit on Capital Goods in GST – Question and Answer
Many questions arise prior of taking Input Tax Credit on Capital Goods like car, office building, Furniture, software, etc in Goods and Service Tax (GST) Regime. Before we start the discussion on this topic, it is important to understand few definitions to go ahead.
1. Capital Goods
As per section 2(19)of CGST Act, 2017 , Capital Goods means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
Section 2(59)of CGST Act, defines Input as any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.
3. Input Service
As per section 2(60) of CGST Act, Input Service means any service used or intended to be used by a supplier in the course or furtherance of business.
4. Input Tax
As per section 2(62) “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act,
but does not include the tax paid under the composition levy.
5. Input Tax Credit
Section 2(63) defines Input Tax Credit as credit of Input Tax.
6. Input Tax Credit
As per section 16 of CGST Act, every registered person, subject to conditions, restrictions, and manner as prescribed under section 49, should be entitled to take credit of input tax, charged on supply of goods or services or both to him, which are used or intended to be used in the course or furtherance of business.
Now we can understand from the above section that input tax credit is available only to the person registered under the Act, but as per the eligibility under section 49. However, this section does not distinguish between capital goods and inputs. Hence, let’s understand meaning of capital goods now.
A. What is Capital Goods?
As we have gone through the definitions, it is clear that if any good has to be classified as Capital Good (CG), it shall have the following characteristic-
- It should be capitalised in the books of accounts of the taxpayer. Mostly these are capitalised as per the Income Tax Act or Companies Act. On year to year basis depreciation is charged.
- It should be used in the business.
- It should be received by the taxpayer.
- Tax invoice in respect of such purchases shall be available in the record.
For example, it can be Plant & Machinery, Building, Vehicles, Equipment, etc. These are used mostly to provide goods or services.
Let us understand this with the following example :
X Ltd. is manufacturing note books. Materials consumed in the process are papers and card boards. Printing machine is used to print lines on the paper. Cutting machine is used in cutting the papers in same size. Then, cardboard is stitched to papers and books are produced. Now, let us see what is Input, Capital good and Input services in this business. Papers, card board, colours are the Inputs. Cutting machine, printing machine are capital goods. Also X Ltd is availing banking services for it’s business from the No Bank Ltd, these bank services are input services.
B. Can we claim ITC on capital goods?
Yes, ITC can be claimed on capital goods, after satisfying conditions like documents, receipt of goods, payment of consideration in the month of the purchase. We can claim ITC on capital goods in the month of the purchases of goods. ITC can’t be claimed if tax component is also capitalised in the books for charging depreciation.
For example, On 01.04.19, X Ltd, purchased cutting machinery for Rs. 1,18,000. (GST component is Rs. 18,000). Now, X Ltd, can claim ITC of Rs. 18,000 and capitalise machinery at Rs. 1,00,000.
Let’s understand with entries in books of X Ltd :
|01.04. 2019||Cutting Machinery A/c Dr||1,00,000|
|Input Tax Credit (GST) A/c Dr||18,000|
|To Y Ltd||1,18,000|
|(Being Machinery purchased, and input tax credit availed.)|
|31.03. 2020||Depreciation A/c Dr||15,000|
|To Machinery A/c||15,000|
|(Being Depreciation charged on machinery @ 15%)|
C. Subsequent sale of Capital Goods
As per section 18(6), in case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher.
Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.
As per Rule 40(2), the amount of credit in the case of supply of capital goods or plant and machinery, for the purpose of sub-section (6) of section 18, shall be calculated by reducing the input tax on the said goods at the rate of 5 % for every quarter or part thereof from the date of the issue of the invoice for such goods.
Let us understand this with the help of following example:
If the cutting machinery in above example is sold on 01.10.2020 for Rs. 80,000.
The amount of tax to be paid on such sale is :
- Input Tax Credit paid on said capital goods
Less : 5 % for every quarter
- 18000 – 5400 (Note) = 12600
- Tax on the transaction value of such capital goods determined under section 15 of CGST Act = 14,400 (80,000*18%)
Whichever is higher. Hence, it needs to pay tax of Rs. 14,400.
Note: Now, it has retained machinery for 6 quarters (3 quarters in 2019 and 3 in 2020). Hence it can retain ITC of 30%(6*5), Rs. 5,400 (30% of 18,000)
D. Can we avail ITC on Capital Goods sent to Job worker ?
ITC on capital goods sent to job worker is available in full. Even in case where capital goods are not received by the registered person, but are sent directly to the job worker, ITC in the full is available.
The main condition in this is that capital goods shall be received back by the taxable person within 3 years from the date of invoice. If capital goods are not received back in 3 years, then it is deemed as capital goods have been supplied to the job worker on the day when capital goods were sent and the said supply shall be declared in FORM GSTR-1 and the principal shall be liable to pay the tax along with applicable interest.
E. What if capital goods are used partly for personal use and partly for business use? What if capital goods are used in the supply of exempt and taxable supply ?
Many a times, business uses capital goods for personal use and business use. But ITC is available only on goods exclusively used for business. Also, CG are used for the supply of exempted supply and taxable supply. As on exempted supply, GST is not required to be paid, hence ITC should not be claimed. But as CG is simultaneously used for taxable and exempt supply. In this case, common credit is calculated and same is added into output tax liability.
F. Calculation of increase in output liability because of common credit :
Useful life of asset is considered as 5 years from the date of purchase of capital goods. This input tax will be credited to electronic ledger and will be distributed over useful life. The calculation is as follows-
|Common input tax||Tc|
|Useful life of capital goods||60 months|
|Input Tax credit attributable to tax period||Tm|
|Calculation of Tm||Tm = Tc/60|
|ITC on all common capital goods||Tr = Tm+Tm+Tm+…|
|Amount of common credit attributable towards exempted supply||Te|
|Exempt supply made during tax period||E|
|Total turnover during tax period||F|
|Calculation of Te||Te = (E/F) x Tr|
Hence, every month Te will be reversed. Let’s understand this with following example :
|Common ITC (Tc)||Rs. 120,000|
|ITC attributable for the month of February 19 (Tr)||Rs. 2,000 (1,20,000/60)|
|Exempted supply for February 19 (E)||Rs. 1,80,00,000|
|Total turnover for February 19 (F)||Rs. 3,00,00,000|
|Increase in output liability (Te) = (E/F) x Tr||Rs. 1,200|
If CG was earlier used for exempt supply or only for personal use and then bought to be used for taxable supply or business purpose, then value of ITC to be availed shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof.
G. ITC of capital goods in case of composition scheme :
A registered taxable person who had opted for composition scheme, cannot claim ITC on CG.
When he starts paying tax as per normal rules, i.e, opt out of Composition Scheme
As per section 18 (1) (c), 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.
As per Rule 40, ITC in above case shall be claimed after reducing the tax paid on such capital goods by five percentage points per quarter of a year or part thereof from the date of the invoice or such other documents on which the capital goods were received by the taxable person.
When a person shifts from regular registration to composition scheme, i.e, opt in Composition Scheme
The amount to be paid shall be calculated by reducing the input tax on the said goods at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods.
Blocked ITC on Capital Goods-
As per section 7 (5), ITC on following Capital Goods is not allowed :
(a) Motor vehicles and other conveyances except when they are used––
- for making the following taxable supplies, namely:—
- further supply of such vehicles or conveyances ; or
- transportation of passengers; or
- imparting training on driving, flying, navigating such vehicles or conveyances;
- for transportation of goods
Hence, from above it is clear that if motor vehicles are used for the travel of directors, even though it is capital goods, and capitalised in the books, credit on the ITC cannot be availed.
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Therefore, if goods are purchased for constructing building, being immovable property, ITC on it will get blocked.
H. Amount to be paid when registration is cancelled–
The ITC earlier availed on Capital Goods need to be reversed. The amount to be paid shall be calculated by reducing the input tax on the said goods at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods.
The authors of above article are CA Ankita Gandhi.
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