Concept Basics - ITC on Capital goods - Finance Ppl

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Concept Basics - ITC on Capital goods

What are capital goods

Capital Goods are defined in Section 2(19) of the CGST Act as : Goods, 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.

Key features of CG as per the definition are:
  1. Capitalised in the books of account (Meaning: They are recorded as fixed assets in balance sheet and not expensed).
  2. They are used in the course or furtherance of business (Used for business operations).
Rules for taking credit on Capital Goods

Businesses can claim ITC on GST paid for capital goods, provided the following are complied with.

  1. GST must have been paid on the capital goods used for business or intended for use in course of business
  2. ITC shall be allowed, only if the capital goods is used for taxable supplies.
  3. In case of assets used for both taxable and exempt/personal purposes, the credit must be apportioned.
  4. To take credit, the business must possess a valid document ie tax invoice or debit note issued by the supplier.
  5. ITC can only be claimed if the invoice appears in the auto-generated GSTR-2B statement based on the supplier's filings.
Time Limit for Availing ITC

ITC must be claimed by earlier of (a) at the time of filing the annual return (b) 30th November of the following financial year

Restrictions for taking credit on Capital Goods

ITC is not available in the following scenarios:

  1. Simultaneously claim of both ITC on the GST paid for capital goods and depreciation on the same tax component under the Income Tax Act, is prohibited.
  2. Cannot be claimed if the CG are used for production of exempt supplies, even though they are used for business only.
  3. Sec 17(5) talks about Blocked credit on certain goods and services, even if used for business. Under the section, ITC is specifically blocked for certain items, such as motor vehicles (unless used for specified purposes) and goods used for construction of immovable property, except for plant and machinery
  4. Goods used exclusively for personal purposes are ineligible.
Apportionment of ITC
  1. Used for taxable supplies: Out of total input credit available on capital goods, credit of capital goods used exclusively for taxable supplies shall be taken.
  2. Used for exempted supplies: Credit of amount of ITC pertaining to on capital goods exclusively used for exempted supplies, shall not be taken.
  3. Common Capital Goods: treatment of Capital goods that are used wrt /or in production of both exempted supplies and taxable supplies, is little tricky and is enumerated as follows
  1. The full value of eligible ITC on the common capital goods is credited to electronic credit ledger in the period when the capital goods are received , provided all conditions are met.
  2. This total ITC amount is divided by 60 months (the stipulated useful life of capital goods under GST law) to arrive at the monthly credit amount.
  3. Then, during each month, the portion of monthly credit that is attributable to exempt supplies is calculated proportionately bases on the ratio of exempted supplies turnover to the total turnover.
  4. Reverse ITC: The amount that is the ineligible ITC for that month and must be reversed. This reversal is reported in Table 4(B) of Form GSTR-3B, effectively adding it to your output tax liability.
  5. Eligible ITC: The remaining amount that is the eligible ITC for that month, can be used to offset your output tax liability. This process continues every month for 60 months from the date of the invoice
Reversal on Sale or Disposal

If capital goods on which ITC credit has been taken, are sold or disposed before the end of the stipulated 5-year useful life, the taxpayer must pay an amount equal to the higher of:

  1. The ITC taken on the asset, reduced by 5% for every quarter (or its part thereof) of use.
  2. The GST on the actual transaction (sale/disposal) value of the goods.