All about Input Tax Credit on Capital Goods

Input Tax Credit is the key pillar of GST. Input Tax Credit plays vital role in determination of net tax liability of a taxpayer. Under GST, “Input Tax Credit” has been defined as “the credit of Input Tax” and “Input Tax” is defined as 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 include      (You are reading a blog on “Input Tax Credit on capital goods”)

• IGST paid on Import of Goods
• GST paid under reverse charge

But does not include the tax paid under the composition levy.

On the basis of above reading, it is clear that all kind input tax has kept at same parity whether it belongs to services or goods or Input Credit on capital goods.

Let’s understand all the provisions relating to Input Tax Credit on capital Goods

Definition of Capital Goods: “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;

It means whenever taxpayers purchase any goods which are recorded in their books of accounts as capital item (i.e. does not written off in profit loss account in the year of purchase) will be classify as capital goods under GST.

Now a question comes into mind that if there is no differentiate between “input credit of Input” (trading goods) and “capital goods” then why separate definition of capital goods was introduced. The answer is, 100% input tax credit on capital goods are allowed at the time of received/purchased ( i.e. in the tax period in which such goods actually received) of such capital goods, however if such capital goods are being removed (sold or otherwise transfer) with in a period of 5 years from the date of invoice then input tax credit availed shall be liable for reversal.

As per section 17(5) of CGST Act, in certain cases ITC on Capital goods or similar services shall not be allowed if such ITC belongs to following class of capital assets:

1. a) “Motor vehicles” and “other conveyances” however credit will be allowed when motor vehicle are used for making taxable supply of

1) supply of such vehicles or conveyances

2) transportation of passengers

3) imparting training on driving, flying, navigating such vehicles or conveyances

4) for transportation of good.

Or

Motor vehicles used for transportation of persons having approved seating capacity of more than 13 persons (including the driver)

1. b) Works contract services when supplied for construction of an “immovable property” (other than plant and machinery)
2. c) Goods or services or both received by a taxable person for construction of an immovable property

On the basis of reading of section 17(5) relating to treatment of ITC on Capital Goods, it is clear that input of Motor Vehicle and Immovable property shall not be allowed. Such Immovable Property can be constructed by taxpayer itself or can be outsourced to contractor for construction. However credit of motor vehicle can be obtained in certain cases as mentioned above.

Further as per section 16(3), ITC on capital goods is not available in respect of tax element (IGST or CGST and SGST/UGST) of capital goods upon which depreciation is claimed under Income Tax Act 1961.

Reversal of Input Tax Credit on Capital Goods:

As per section 18(6) of CGST Act read with rule 40(2) if Capital Goods on which ITC has been claimed are being supplied (sold or otherwise) within 5 years from the date of invoice the taxpayer shall be liable to pay certain amount as explained under rule 40(2) of GST Rules. (if reversal in not made as per rules the interest shall be payable)

As per rule 40(2) of GST Rules

• 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 [Credit Availed*(20 quarter – no. of quarter for which capital assets used) /20 quarters] or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher

Example on Reversal of ITC when capital assets are supplied within 5 years of Purchase:

Mr A was a registered taxpayer in Punjab purchased a Machinery of INR 20 Lakh on 20^th January 2018 and paid GST of INR 3.6 Lakh. Such Machinery was capitalised in books of accounts of Mr. A. On 24^th January 2019 such machinery was sold at 5 Lakh plus 90000 GST.

Now taxpayer is liable to pay GST as per below formula:

Total ITC Availed: 3,60,000

Period for which assets was used: 20^th January 2018 to 24^th January 2019 (Lets convert these days into quarter which comes to 5 quarter)

Calculation of tax payable: 3,60,000*(20-5)/20=2,70,000

Tax to be paid is higher of tax charges on supplies i.e. 90,000 or tax calculated as per formula which is 2,70,000.

Important point relating to ITC on Capital Goods:

• A composition dealer cannot take Input Tax Credit of capital goods however if such composition dealer opt out from composition scheme to normal scheme then ITC shall be allowed after reduction of 5% per quarter from the date of invoice for purchase of such capital goods. Similarly, if the taxable person opts for Composition Scheme u/s 10 or goods become exempt subsequently, then ITC, earlier claimed, will be paid back after reduction of 5% per quarter from the date of purchase of capital goods, till the date of opting for Composition Scheme or date of exemption.
• If taxpayer exporting goods under LUT without payment of tax, refund of ITC on capital goods shall not be allowed. However if tax has been paid on export and such tax was paid being utilised by ITC on capital goods then refund of such tax paid on export can be claimed.
• If Capital goods are being exclusively used for supply of exempted goods then ITC shall not be allowed .

Conclusion:

ITC on capital goods is allowed however there are some restriction  which either not allows to take ITC or if ITC has been availed then such ITC shall be reversed. In General 100% ITC on capital goods are allowed in the tax period in such capital goods are being received.