Capital goods means goods, the value of which is
capitalised in the books of account of the person claiming the credit
and which are used in the course of or furtherance of business.
Input
tax credit means credit of Input tax i.e. tax levied on input goods,
input services or both. Any goods (including capital goods) and any
input services used or intended to be used by a provider of
goods or
services of both in the course of or furtherance of business is eligible
for input tax credit. Section 2(62) of Central Goods and Services Tax
Act (CGST Act) defines Input tax in relation to a registered person as
the Goods and Services Tax (GST) charged on any supply of goods or
services or both made to him and includes:
- Integrated GST (IGST) on import of goods
- Central
Goods and Services Tax (CGST), State Goods and Services Tax (SGST) or
Union Territory Goods and Services Tax (UTGST) paid on procurement
within the state
- Tax payable under the provisions of reverse
charge of CGST, IGST, SGST, UTGST But does not include the tax paid
under composition levy.
How to take input tax credit (ITC)?
Every
registered taxable person shall be entitled to take credit of input tax
charged on goods or services or both supplied to him. It is important
to note that ITC is available only if such goods or services or both are
used or intended to be used in the course of or furtherance of
business.
In case of eligible ITC, the said amount shall be
credited to the electronic credit ledger i.e. the input tax credit
ledger maintained on the GST portal for each registered taxable person.
The recipient of goods or services can avail ITC only if the supplier
has deposited GST with the Government.
Meaning of capital goods for the purpose of claiming ITC
As
per section 2(19) of CGST Act, capital goods means goods, the value of
which is capitalised in the books of account of the person claiming the
credit and which are used in the course of or furtherance of business.
Capital goods shall include Plant and Machinery such as apparatus,
equipment and machinery fixed to earth by foundation or structural
support that are used for making outward supply of goods or services or
both and includes such foundation and structural supports but excludes
- Land, building or any other civil structures
- Telecommunication towers
- Pipelines laid outside the factory premises
Input tax credit of capital goods
Entire
ITC of GST paid on capital goods will be available in the first year
itself as capital goods fall in the category of “goods” as defined by
the CGST Act.
Depreciation claimed on value of capital goods
As
per section 16(3) of the CGST Act, in case the registered taxable
person has claimed depreciation on the tax component of the value of
capital goods, ITC on the said tax component shall not be allowed.
Let’s
explain this with the help of an example, Simran purchased capital
goods worth Rs 10 lakh and paid a GST of 1.8 lakh. She claimed
depreciation on the total value of 11.8 lakh. In this case, ITC will be
available only on Rs. 10 lakh and she should claim depreciation in
income tax only on Rs 10 lakh.
Subsequent sale of capital goods
Where
a registered taxable person purchases capital goods and claims the ITC
with respect to such purchase but subsequently sells such capital goods,
special provisions of section 18 (6) of the CGST Act shall apply.
According to this provision, the registered taxable person shall pay the
following amount:
- Input Tax Credit paid on said capital goods
Less : Percentage point as may be specified in the CGST and SGST rules, 2017
Or,
- Tax on the transaction value of such capital goods determined under section 15 of
CGST Act, Whichever is higher.
As
per rule 40(2) of CGST and SGST Rules, 2017, ITC on credit in the case
of supply of capital goods and plant and machinery shall be reduced by
the ITC at five percentage point for every quarter or part thereof, from
the date of issue of invoice for such capital goods or plant and
machinery.
Where refractory bricks, moulds and dies, jigs and
fixtures are supplied as scrap, the registered taxable person may pay
tax on the transaction value of such goods determined under section 15.
Let’s
explain this with the help of Simran’s example above, Simran has a
company called DDLJ Private Limited and she purchased machinery on 1 st
October 2018 for Rs 10 lakh on which GST was paid at the rate of 18%.
She took ITC on the above purchase and used the machine for some time.
On 4th November 2019, she sold the machinery for Rs 8 lakh.
In
this case, DDLJ Private Limited took ITC credit of Rs 1.8 lakh in
October 2018 and used the machinery for the following quarters: Year
2018 – 1 quarter and Year 2019 – 4 quarters
Thus DDLJ Private
Limited is eligible for ITC at 5% per quarter i.e. 25%, therefore, it
can retain Rs 45,000 (25% of Rs 1.8 lakh) and pay an amount equal to Rs
1.35 lakh (75% of Rs 1.8 lakh).
Now in order to calculate the
transaction value as per section 15, take the sale value of machinery
i.e. Rs 8 lakh and compute the GST paid on the transaction value at the
rate of 18% i.e. Rs 1.44 lakh. Since the amount which is higher of the
above is to be paid, Rs 1.44 lakh will be payable in GST (IGST/ SGCT and
CGST as the case may be).