Capital assets input credit and reversal of Input credit in subsequently taxable service period

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Anand Ghadge (Querist)
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28 February 2024 Hi
Query mention as below :-

Capital Assets/ goods input is completely taken during the combined service and reversed within the next 60 months. Currently providing services that are fully taxable, so it's important to determine whether the capital input credit needs to be reversed throughout the reaming period.
Kindly give advice and suggestions regarding the right way of reversal input credit.

For example, capital assets purchased in 2018–2019, input took in full, and reversal credit in the next 60 months .we are offering combination services until FY 2022–2023 and completely taxable services starting in FY 2023–2024. Can we liable for input credit reversals for capital assets during the Remain period?

Thanks in advance for your valuable suggestion

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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06 July 2024 When it comes to the reversal of input tax credit (ITC) on capital goods under GST, the rules specify that if the intended use of capital goods changes from taxable to non-taxable, or vice versa, it can affect the ITC claimed. Here’s how you should approach the situation based on your scenario:

### Understanding Input Tax Credit Reversal on Capital Goods

1. **Capital Goods Definition:** Capital goods are defined as goods with a useful life of more than one year, including machinery, equipment, and furniture.

2. **Input Tax Credit (ITC) Reversal Rule:** According to GST regulations (Section 18(6) of the CGST Act), if there is a change in the use of capital goods from taxable to non-taxable supplies or vice versa, the ITC needs to be adjusted.

### Specific Scenario:

- **Purchase and Full ITC Claimed (2018-2019):** You purchased capital assets in 2018-2019 and claimed full input tax credit on them, considering they were used for providing taxable services.

- **Change in Service Nature (From FY 2023-2024):** Starting from FY 2023-2024, your services transitioned from combined (taxable and non-taxable) to fully taxable services.

### Reversal of Input Tax Credit:

- **Applicability:** Since your services were previously combined (taxable and non-taxable), and now they are fully taxable, there is no requirement to reverse the input tax credit on capital goods. The transition from mixed to fully taxable services does not trigger a reversal of ITC under GST rules.

- **Reversal Period:** The reversal of ITC typically applies when there is a change from taxable to non-taxable use or vice versa. Since your change is within the realm of taxable supplies (from mixed to fully taxable), no reversal is required.

### Steps to Ensure Compliance:

- **Documentation:** Maintain clear records of the nature of services provided and the use of capital goods. This helps in demonstrating compliance during audits or assessments.

- **Periodic Review:** Periodically review your business activities and GST implications to ensure continued compliance with GST laws.

### Conclusion:

Based on the information provided, your situation does not require the reversal of input tax credit on capital goods due to the change in service nature from combined to fully taxable services. Ensure you document this change and maintain records accordingly to support your compliance stance.

If you have any specific doubts or need further clarification, it’s advisable to consult with a GST professional or a chartered accountant who can provide tailored advice based on the specifics of your business operations and GST obligations.