Input Tax Credit on Capital Goods under GST

Input Tax Credit on Capital Goods under GST

Hi Readers, in this Article we will discuss provisions related to Input tax credit on Capital Goods under GST. We also discuss the provisions related to Reversal of ITC on Capital Goods under GST. Before starting, one must familiar with the definition of Capital Goods under GST.

What are Capital Goods: –

Capital goods is defined under section 2(19) of CGST act, according to definition, Capital goods means those goods whose value are capitalised in the books of accounts and which are used or intended to be used in the course or furtherance of business.

Input Tax Credit or Depreciation on GST Component: –

Section 16(3), if the registered person has claimed depreciation on GST component of capital goods under the provision of Income Tax Act 1961 then input tax credit on GST component shall not be allowed.

Also, Input Tax Credit shall not be available in respect of those goods which are fall within the scope of Section 17(5).

Condition for entitlement of Input Tax Credit – Section 16(2): –

If Capital goods is used for business or furtherance of business then every registered person is eligible for input tax credit on capital goods subject to following conditions: –

(i)  Registered person is in procession of a Tax Invoice or Debit Note issued by the registered supplier or any other tax paying documents;

(ii)  He has received the goods or services or both;

(iii) Tax charged in respect of said supply has been paid to Government either in cash or through utilisation of input tax credit;

(iv) Registered person has to furnish the return under section 39 of CGST Act.

Also See, “GST Input Tax Credit – Eligibility, Conditions, Apportionment, non-availability

Apportionment of input tax credit: –

1.  Input Tax Credit shall not be available on capital goods which is used or intended to be used exclusively for non-business purpose or for exempt supplies.

2.  Input Tax Credit shall be available on capital goods which is used or intended to be used exclusively for business purpose including for zero rate supplies.

3.  Input tax credit on capital goods which is used or intended to be used for common purposes means business as well as not business purpose, the input tax credit shall be allowed on proportionate basis.

Provided if capital goods which are earlier used other than business purposes and later the same is used for business as well as not business purposes then input tax credit shall be available by reducing the input tax at the rate of five percent points for every quarter or part thereof and balance amount input tax credit shall be credited to the electronic credit ledger;

For above purpose, Capital Goods has assumed a life of 5 years, so ITC in respect of capital of goods shall be available over a period of 5 years / 60 Months / 20 Quarters. Rule 43 of CGST Act specifically uses the term 5% per quarter.

Reversal of Input Tax Credit on Capital Goods: –

A Registered person have to reverse input tax credit in respect of following situations: –

1.  Every registered person who opt to pay tax under composition scheme under section 10 of CGST Act, then he shall pay an amount equal to the input tax credit taken on capital goods as reduced by such percentage as may be prescribed (Rule 44 of CGST Act) on the day immediately preceding the date when such option exercise. [Section 18(4) of CGST Act].

2.  If a registered person who first provide taxable goods or services and after a date goods or services provide by him become wholly exempt then he shall pay an amount equal to the input tax credit taken on capital goods as reduced by such percentage as may be prescribed (Rule 44 of CGST Act) on the day immediately preceding the date when such option exercise. [Section 18(4) of CGST Act].

3.  Every registered person whose registration is cancelled then he shall pay an amount equal to the input tax credit taken on capital goods as reduced by such percentage as may be prescribed (Rule 44 of CGST Act) or tax on transaction value of such capital goods under section 15, whichever is higher. [Section 29(5) of CGST Act]. Please check below mention example.

The above mention reversal can be paid by debit in electronic credit ledger or electronic cash ledger.

Rule 44 of CGST, prescribed the manner of reversal of input tax credit: –

The amount of input tax credit for capital goods for remaining useful life (taking the useful life as 5 years) shall be computed on pro-rata basis.

For Example: –

Capital goods had been in use for 4-years, 6 months and 15 days

Remaining Life: 5 Months (ignoring a part of the month)

Let’s assume, Input tax Credit taken on Capital Goods: INR 30,000

Reversal of Input Tax Credit: INR 30,000 multiplied by 5/60 = INR 2,500

If the capital assets have been disposed of at sale consideration of INR 20,000 and applicable GST over it is INR 3,600 then amount calculated INR 2,500 above is less than the tax on transaction value of capital goods; then registered person have to pay tax amount which is calculated on transaction value i.e. INR 3,600.

On the other hands, If the capital assets have been disposed of at sale consideration of INR 10,000 and applicable GST over it is INR 1,800 then amount calculated INR 2,500 above is greater than the tax on transaction value of capital goods; then registered person have to pay tax amount of INR 2,500 which is calculated above.

Job work and Capital Goods related provision: –

Input tax credit by Principal

The principal shall, subject to such conditions and restrictions as may be prescribed, be allowed input tax credit (ITC) on capital goods under GST, sent to a job worker for job work.

The principal shall be eligible for taking input tax credit on capital goods even if the capital goods first not brought to his place of business and are directly sent to a job worker.

Reversal of Input tax Credit by Principal

Where the capital goods sent for job work are not received back by the principal within a period of three years from the date of goods sent out, it shall be deemed supply in the hand of principal to the job worker. Time of supply shall be on the day when the said capital goods were sent out by principal to job worker and the principal shall be liable to pay the tax along with applicable interest from that date.

The period of three years shall be calculated from the date of receipt of capital goods by the job worker

However, the period of three years is extended by additional two years by amending the section 143.

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