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Introduction:

Input tax credit is the most important feature of the GST era.

Sec (19) of CGST Act states “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.

Goods will be regarded as capital goods if the following conditions are satisfied:

(a) The value of such goods is capitalised in the books of account of the person claiming input tax credit;

(b) Such goods are used or intended to be used in the course or furtherance of business.

Input Tax Credit Rules in case of capital goods:

Rule 8 of the ITC rules deals with ITC in case of capital goods.

a. The amount of ITC shall not be credited to the electronic credit ledger under the following circumstances:

Capital goods used or intended to be used

(i) exclusively for non-business purposes

             (ii) exclusively for effecting exempt supplies

b. The amount of ITC (in full)  in respect of the capital goods used or intended to be used exclusively for effecting taxable supplies including zero-rated supplies shall be credited to the electronic credit ledger.

c. ITC in case of capital goods used commonly for exempt and taxable supplies and/or business and non-business purposes, shall be claimed as under:

i. The total amount of ITC shall be credited to the electronic credit ledger.

ii. Useful life of such capital goods shall be taken as 5 years.

iii. The total amount of input tax credited to Electronic Credit Ledger is called as “Common credit”. This common credit shall be distributed over the whole useful life of the capital goods.

Credit for a tax period = ITC credited to Electronic Credit Ledger / 60(5 years * 12 months)

d. Tax period shall be every month.

e. The amount of common credit attributable towards exempted supplies is calculated as under

ITC attributable to exempted supplies =   (Value of exempted supplies/ Total Turnover) * Credit for a tax period.                                    

f. The amount of ITC towards exempted supplies, along with applicable interest,shall during every tax period of the residual life of the concerned, be added to the output tax liability of the person making such claim of credit.

g. Balance amount of credit after deduction of ITC shall be allowed as ITC.

h. In case, where any capital goods was initially used exclusively for non – business purpose or for effecting exempt supplies, but later used commonly for business and non-business purpose and for effecting taxable and exempt supplies, ITC to be credited to the electronic ledger shall be as under           

ITC = Input Tax - 5% of Input tax for every quarter or part thereof.

Example

ABC Ltd has purchased 3 machineries in April 2017 to be used for various purposes as per the table given below. Total aggregate supplies = Rs.18 cr, value of exempt supplies = Rs.3 cr. Calculate ITC for the month of April 2017.

Tax credit for a tax period for Machine – 3 = 72000/60 = 1200 .

ITC attributable to exempted supplies = 3/18 * 1200 = 200.

The above amount of Rs.200/- will be added to the output tax liability for every tax period.

Reversal of ITC in case of capital goods

1. In case capital goods were initially used for non-business purposes and for effecting exempted supplies, but subsequently used for business and non-business purpose and effecting taxable and exempt supplies, then 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.
2.  In case of capital goods which were earlier used, or intended to be exclusively used for effecting taxable supplies and business purpose, but subsequently used for business and non-business purpose and effecting taxable and exempt supplies, then 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.