Input Tax Credit for Capital Goods under GST

Calculation of input tax credit for capital under GST, input tax credit availability and non-availability and calculation of reversal of input tax credit has its own special provisions. Further, there is special provisions for capital goods that are used for both taxable as well as exempted supplies. In this article, we look at the applicability of input tax credit for capital goods under GST in detail along with input tax credit formulas under GST. Know more about Input Tax Credit under GST.

Capital Goods as per the GST Act

As per provisions of section 2 (19) of the Act, “Capital goods” means goods, the value of which is capitalized 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.

Capital Goods and Other Inputs - Difference

Input goods are goods used for making a final product. In other words, input goods are multiple products clubbed together to make a product complete. It can also be treated as materials used to produce the product. The cost involved in producing these input goods shall apply as a business cost. Capital goods are treated as products that help to complete as the final products and make ready for shipping. Many capital goods products take more a year to consume. Hence cost may not apply as business cost fro the year and the deduction occurs at fixed usage lives of the product. Capital goods support the company or industry by producing goods. For example, assuming a vendor operates a juice stall. To prepare the juice, the vendor buys fruits, ice cubes, sugar, glasses, straws, furniture, and other required items. However, to make the juice, the vendor uses the blender. The final product is the juice and the blender shall apply as the capital good.

Input Tax Credit on Capital Goods

Section 16 of the CGST Act also states that all persons registered with the GST can avail Input Tax Credit (ITC). The registered person can avail the ITC to expand the business or other purposes that affiliates with the business. When capital goods are used exclusively for business purposes and the input tax credit shall apply under GST. To claim the input tax credit on capital goods, the taxpayer should record the business transaction while filing the GST return filing. However, input tax credit on capital goods purchase is not available for capital goods used exclusively for effecting exempt supplies and for capital goods used exclusively for personal use. If in case, GST applies at a nil rate for the products supplied, then the taxpayer cannot avail Input Tax Credit for the said products. This shall apply also for the exempted goods. Hence, the taxpayer can claim the Input Tax Credit on capital goods only if it applies as taxable sales and the person recorded in the book. The following below examples explain the use of capital goods at exempted sales and personal use:

Capital Goods used towards exempted sales

Example: For instance, the juice vendor makes juice using the blender. But if the vendor conducts business without a brand name becomes exempted from GST. Hence, the vendor cannot apply Input Tax Credit for the said goods used.

Capital Goods used towards personal use

Example: The same juice vendor, uses the blender for personal use at home or at other places but not using for business. This product shall apply as personal purchase and hence the cost shall not reflect under GST. Therefore, the vendor cannot avail for Input Tax Credit.

Input Tax Credit Calculation on Capital Goods

As per Section 16(3) with respect to the capital goods which attracts GST as per Section 17 (1) and Section 17 (2) shall apply the below following mode of calculation even of goods partly used for other purposes or partly used for effecting taxable supplies, also including zero-rated supplies:

If the taxpayer uses or used the capital goods (with respect to the input tax credit) exclusively for non-business purposes should record in the transaction and should indicate in Form GSTR-2 and in Form GSTR-3B. The amount shall not be credited in the electronic credit ledger.
Any capital goods used by the taxpayer with respect to the input tax credit for effecting taxable supplies including zero-rated supplies should reflect in Form GSTR-2 and in Form GSTR-3B. The amount shall be credited in the electronic credit ledger. This shall apply as per Schedule II paragraph 5(b) of the same Act and as per rule 43(1)(b) of CGST Rules.
The life of the capital goods shall apply as five years for any goods not covered under clause (a) and (b) and denoted as A. The amount shall be credited to the electronic credit ledger.
- If the same capital goods covered under the clause (a) and also covered under (c), the taxpayer may calculate the value of 'A' by deducting the Input Tax at the rate of 5% for every quarter. After deducting the ITC, the value shall be added to the electronic credit ledger.
- If the capital goods as produced by the taxpayer covered under these clauses, then the requirement of reversal of ITC as per Section 18(4) of the CGST Act shall not apply. The reversal shall not apply because the ITC is already deducted.
Any amount related to 'A' credited to the electronic credit ledger, shall be denoted as 'Tc'. If the same capital goods used by the taxpayer covered under clause (b) and also covered under clause (d), can calculate the value of 'A' by deducting the Input Tax at the rate of 5% for every quarter and then added to the aggregate value of 'Tc'. This shall apply to goods initially used only for taxable supplies but later used for exempt supplies.

Input Tax Credit Formula on Capital Goods

In case a capital good is used for both business and personal use, then the input tax credit on the same has to be calculated as per the following formula:

GST Paid on Monthly Basis - Input Tax Credit on Capital Goods - Mixed Use

Input Tax Credit = Input Tax Credited to Electronic Ledger / 60 The number 60 is derived from multiplying 5 years by the number of months. Hence, 5 * 12 = 60.

GST Paid on Quarterly Basis - Input Tax Credit on Capital Goods - Mixed Use

Input Tax Credit = Input Tax Credited to Electronic Ledger / 20 The number 20 is derived from multiplying 5 years by the number of quarters. Hence, 5 * 4 = 20.

Personal Use Converted to Mixed Use

Below formula is to be used when capital goods which was earlier used for personal purpose and later on used for both, personal and business purpose. Input tax to be credited to electronic credit ledger = Input Tax – 5% of Input tax for every quarter or part thereof from date of invoice.

Common Input Tax Credit Attributable Towards Exempted Supplies

Formula for calculating common credit towards exempted supplies is: Step 1: Credit Attributable to Exempted Supplies = (Value of exempted supplies / total turnover) * Credit for tax period. Step 2: Allowable Input Tax Credit = Total input tax credit – credit attributable to exempted supplies.

Sale of Capital Goods

Section 18 of CGST Act, contains provisions of sale of such capital goods and conditions and restrictions in case of supply of goods on which input tax credit has been taken below is payable:

An amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage as per provisions of Rule 44(6); or
The tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher.

As per rule 44 (6) amounts of input tax credit involved in capital goods held in stock, the Input tax credit involved in the remaining useful life in months shall be computed on pro-rata basis, taking the useful life as five years. Further, section 18 of CGST Act, also provides that, dies, moulds and jigs, refractory bricks, fixtures and jigs to be treated as scrap, the registered person under GST Act may pay taxes on transaction value of such goods prescribed under section 15.

Reversal of Input Tax Credit on Capital Goods

Following are the situations under which input tax credit availed on the capital goods needs to be reversed:

When taxpayers opts to pay tax under composition scheme.
When goods or services supplied by the taxpayer becomes exempted.
When there is supply of capital goods, on which input tax credit has been availed.
When the registration of registered tax payer has been cancelled Input tax credit involved in the remaining useful life in months will be computed on pro rata basis, taking the useful life as five years.

Removal of Capital Goods after Use

If the taxpayer removes the capital goods after use on the goods for which the Input Tax credit has been availed, then the registered person shall pay an amount equal to the input tax credit of the goods or machinery with a reduced percentage. The percentage can be calculated by the value of the said capital goods, plant or machinery as directed by Section 15 of the CGST Act or by Section 18 (6) of the CGST Act, whichever is higher. The taxpayer shall calculate the amount by deducting 5% of the Input Tax Credit for every quarter or from the date of the invoice for the said capital goods as per Rule 40(2) of the CGST Act and SGST Rules 2017. However, if the capital goods used by the taxpayer such as bricks, jigs, dies and fixtures the registered person may pay tax on the transaction value of such goods as per Section 15 of the CGST Act. For TDS and Annual Filing, click here.