Input Tax Credit on Capital Goods under GST

Capital Goods and Input Tax Credit on it.

Input tax credit has been an important aspect for all taxpayers since the implementation of GST  era. Today we will discuss the rules and conditions in respect of Input Tax Credit on Capital Goods under GST.  As per Sec (19) of CGST Act “CAPITAL GOODS” means goods the value of which is capitalized in the books of account claiming the input tax credit and which are used in the course or furtherance of business.

Image for Input tax credit on capital goods
Image for Input tax credit on capital goods

What is Capital Goods

Goods such as buildings, plants, and machinery, equipment, Tools, vehicles that an organization uses to produce goods or services are called Capital Goods. For example, a blast furnace used in the iron and steel industry is a capital asset for the company. Any Goods will be regarded as capital goods it fulfills the following conditions as under:

  • The value of such goods is capitalized in the books of account of the person claiming the input tax credit.
  • Such goods are used or intended to be used in the course or furtherance of business.

What is Input Tax Credit On Capital Goods

While procuring/purchasing capital material we, before filing GSTR-1, have to pay some tax (GST) on that which is called input tax credit on capital goods under GST.  Later on, this ITC can be on the GST paid on your purchases. Suppose when you purchase a piece of machinery for your factory, we will pay the applicable GST rate. This GST paid can be claimed as a credit in the same way as inputs.

According to section 16 of CGST Act, every registered taxpayer will be entitled to claim (ITC) input tax credit on capital goods or capital expenditure and its depreciation in respect of input the tax credit that is charged to him on the supply of goods or services to him by suppliers. If it is used or intended to be used in the course of or in furtherance of his business.

However, if we claim depreciation on the GST paid while purchasing any capital asset, the above condition will not apply, and we cannot claim an input tax credit on that.

What is Common Credit Under GST?

Any company or business uses various capital goods for production and other purposes. Common Credit is that credit on those Common goods is used partially for production and partially for non-production purposes well as.

For example, Mr. Chanda, being a businessman owns a laptop. Now he uses the laptop for office purposes as well as his personal purposes. He can claim the input credit of GST paid on the purchase of a laptop only to the extent it pertains to his business activities.

The person who is entitled to claim ITC must be registered under GST. Any unregistered personal is not eligible to take ITC on any Input. The section does not make any difference between capital goods and other goods for allowing credit of ITC. Hence, ITC of capital goods is available to be taken, since ITC credit for capital goods is similar to other goods, and is available in the month of purchase. Rule 8 of the ITC rules deal with ITC in the case of capital goods.

Mr. Chanda has also purchased a special designing software for the business. Since this pertains only to his business, he can claim full ITC on this.

Calculations for common credit for partly personal/ exempted and partly normal sales

  1. Useful life spam of the above capital goods will be 5 years from.
  2. Input Tax Credit paid on capital goods will be credited to electronic credit ledger
  3. Now the total amount of input tax credited to electronic credit ledger for the whole useful life will be distributed over the useful life

If GST is paid on a monthly basis then you will use the following formula

For those whose turnover is less than 1.5 crore, they will pay GST on a quarterly basis. For them, ITC will be calculated using the following formula

Reversal of Input Tax credit
Reversal of Input Tax credit

Reversal of ITC in case of capital goods

Cases where capital goods were initially utilized for non-business purposes and for effecting exempted supplies, but subsequently used for business and non-business purpose and effecting taxable and exempt supplies, in that case, the amount of ITC will be credited to the electronic credit ledger shall be arrived at by reducing the ITC @ 5% for every quarter or part thereof.

Cases were capital goods which were initially used for effecting taxable supplies and business purpose, but subsequently utilized for business and non-business purpose and effecting taxable and exempt supplies, in that case, the amount of ITC that will be credited to the electronic credit ledger shall be arrived at by reducing the ITC @ 5% for every quarter or part thereof.

The above must be accompanied by a certificate from a practicing chartered accountant or cost accountant.

In case of sale of capital goods, if the amount determined above is greater than the tax on the transaction value of such sale, then the amount determined as above will be added to output tax liability. The details must be furnished in FORM GSTR-1.

Capital goods send on job work

Input Tax Credit on capital goods will only be allowed to the main manufacturer if a capital asset has been sent to a job work on condition that the goods must be received back within a period of 3 years of being sent out.

But if the goods sent are not sent back within 3 years, it shall be treated as a deemed supply from the date of sending the goods and therefore the tax would be payable along with interest for late payment of taxes.

 

For more information on Input Tax Input Tax Credit Under GST:

 

 

 

 

4 thoughts to “Input Tax Credit on Capital Goods under GST”

Leave a Reply

Your email address will not be published. Required fields are marked *