CAPITAL GOODS
Definition of the term 'Capital Goods' under the Central Goods and Services Tax (CGST) Act, 2017:
As per Section 2(19) of the Central Goods and Services Tax (CGST) Act, 2017, unless the context otherwise requires, the term 'capital goods' means goods, the value of which is capitalized in the books of accounts of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
This will have the effect that certain goods will be considered as inputs even when they are used with capital goods if the said goods are not capitalized in the books of accounts.
However, non-capitalization of goods in books of accounts will also lead to loss of claim of depreciation by the assessee.
Goods that are used with capital goods but are not capitalized will have effect in following situations:
1. The provisions regarding payment of amount on supply of used capital goods will not apply for such goods. In case of supply of capital goods or plant and machinery on which input tax credit has been taken, the registered taxable person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by percentage points as prescribed or transaction value of capital goods whichever is HIGHER.
2. There is different time period specified for job work of inputs and capital goods. In case of job work of inputs, the time limit for receipt of goods by the principal is specified as one year, while in case of job work of capital goods, the time limit for receipt of capital goods by the principal is specified as three years.
If the goods are not capitalized, lesser time as applicable in case of inputs would be relevant
ITC Rules for Capital Goods under GST: RULE 43
Below are the high level rules for determination of Input Tax Credit (ITC) w.r.t. Capital Goods and reversal if any:
A. Credit of Input Tax will not be available on the following:
i. Capital Goods used exclusively for effecting exempt supplies
ii. Capital Goods used exclusively for non-business (personal) activity
B. Credit of Input Tax will be available in totality where Capital Goods have been used for effecting taxable supplies and business activity without any restrictions
C. Amount of input tax referred in above points A and B must be indicated in Form GSTR-2 and however only point B will be credited to electronic credit ledger.
D. Where Capital Goods is used commonly for exempt and taxable supplies and/or business and non-business activity the credit of input tax shall be calculated in the following manner:
1. Such amount shall be credited to Electronic Credit Ledger
2. Useful life of such capital good shall be taken to be 5 years from the date of purchase
3. Now the total amount of input tax credited to Electronic Credit Ledger w.r.t. whole useful life such common capital good shall be distributed over the useful life
Credit for tax period = input tax credited to electronic ledger
60 months (5yrs*12mths)
4. The above amount shall be calculated for all such common capital goods for every tax period namely a month
5. The amount of credit to be added to output tax liability attributable to exempt supplies
= Value of exempt supplies * credit for period
Total turnover
6. Remaining amount after deducting credit attributable towards exempt supplies will be allowed as ITC
7. All the above calculations must be done separately for:
• Central tax
• State Tax
• Union Territory Tax
• Integrated Tax
E. Where a capital good which was earlier used or intended to be exclusively used for:
1. Non- business purpose
2. Effecting exempt supplies
Later to be used commonly as under point D for:
1. Business and non-business purpose 2. Effecting taxable and exempt supplies
Input tax to be credited to electronic credit ledger would be:
= Input Tax – 5% of Input tax for every quarter or part thereof
Let us understand the situation through an example
Mr. XXX bought a Capital Good intended to be used for effecting exempt supplies only, for Rs 1,00,000/- paying Rs 28,000 as input tax on 01/04/2017 and now on 12/12/2018 he wishes to use the capital good commonly for taxable and exempt supplies.
Now the eligible common input tax credit will be calculated as follows
= Input Tax - 5% of Input tax for every quarter or
part thereof
= 28,000 - 5% of 28000 * 3 quarters
= 28,000 - 4200
= 23800
Now Mr. Avinash will credit Rs 23,800 to Electronic Credit ledger and follow the steps shown in point D to calculate the input tax attributable to exempt supplies out of common credit
F. Where a capital good which was earlier used, or intended to be exclusively used for effecting taxable supplies and business purpose
Later to be used commonly for
1. Business and non-business purpose 2. Effecting taxable and exempt supplies
Input tax to be credited to electronic credit ledger would be:
= Input Tax – 5% of Input tax for every quarter or part thereof Manner of reversal of credit under certain circumstances
Under the following circumstances attributable credit of input tax will be added to output tax liability:
1. Where a normal taxpayer opts to pay tax under composition scheme or goods and/or services supplied by him become exempt
2. In case of supply of capital goods or plant and machinery, on which input tax credit has been taken
3. Every registered person whose registration is cancelled
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.
The amount determined must form part of output tax liability and furnished in:
1. Where a normal taxpayer opts to pay tax under composition scheme or goods and/or services supplied by him become exempt- FORM GST ITC-03
2. Registration is cancelled- FORM GSTR-10
Along with certification from a practicing chartered accountant or cost accountant.
In case of sale of capital good, where the amount determined as above is greater than the tax on transaction value of such supply, the amount determined as above will be added to output tax liability and details to be furnished in FORM GSTR1 Capital goods send on job work
Where a capital good including plant & machinery have been send to a job worker for job work, credit of input tax shall be allowed to the principal manufacturer.
Such goods must be received back within a period of 3 years of being send out or else it shall be treated as supply on the date on which goods was earlier send and tax would be payable along with interest for late payment of taxes
Where capital goods have been send directly to job worker after purchase of such capital goods, the period of three years would be calculated from the date of receipt of such goods by the job worker.
The author can also be reached at maheshbobbili.ca@gmail.com
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