ITC Rules on Capital Goods under GST: A Comprehensive Guide

ITC Rules on Capital Goods under GST

Input Tax Credit (ITC) on capital goods under the Goods and Services Tax (GST) regime in India is a crucial aspect for businesses as it allows them to reduce their tax liability by claiming credit for the tax paid on capital goods. The rules governing ITC on capital goods are detailed and require careful consideration to ensure compliance and optimal tax planning.

Applicable Sections and Rules

1. Definition of Capital Goods: Under the GST framework, 'capital goods' are defined as goods, the value of which is capitalised in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business. This includes plant and machinery as defined in the Explanation to Section 17 of the CGST Act and Rule 45 of the CGST and SGST Rules, 2017.

2. Section 16 of the CGST Act: This section provides eligibility and conditions for taking ITC. It states that a registered person is entitled to take credit of input tax charged on any supply of goods or services or both, which are used or intended to be used in the course or furtherance of business.

3. Section 18 of the CGST Act: This section deals with the availability of ITC in special circumstances, such as when a person becomes liable to pay tax or when exempt supplies become taxable. It also specifies that ITC on capital goods will be reduced by 5% per quarter from the date of the invoice.

4. Rule 40 of the CGST Rules: This rule prescribes the manner of availing ITC in special circumstances, including the reduction of ITC on capital goods by 5% per quarter.

Notifications, Circulars, Guidelines, Instructions

Rule 44A of the CGST Rules, 2017: This rule provides for the manner of reversal of credit of additional duty of customs in respect of gold dore bars, which is a specific provision but highlights the structured approach to ITC on capital goods.

Special Provisions for ITC on Capital Goods

• Full ITC Availability: ITC is available in full without restriction where capital goods are used for effecting taxable supplies and business activity. No credit is admissible on capital goods used exclusively for exempt supplies or non-business activities.
• Depreciation and ITC: Credit to the extent of depreciation under the Income Tax Act is not admissible. This means that if depreciation is claimed on the tax component of the capital goods, ITC cannot be claimed on that portion.
• Job Work: Capital goods can be sent to a job worker without reversing credit, provided they are returned within three years. If not returned within this period, the principal must pay the tax along with applicable interest.

Case Laws and Judicial Precedents

While specific case laws were not provided in the context, it is important to note that judicial precedents play a significant role in interpreting the provisions related to ITC on capital goods. Businesses should stay updated with relevant case laws to ensure compliance and optimal tax planning.

Practical Implications

• Compliance Requirements: Businesses must maintain detailed records of capital goods and ensure that ITC is claimed in accordance with the rules. This includes adjusting ITC for depreciation and ensuring the timely return of capital goods sent for job work.
• Impact on Cash Flow: Proper management of ITC on capital goods can significantly impact a business's cash flow by reducing the tax liability.

Examples for Clarity

1. Example 1: A manufacturing company purchases machinery worth INR 10,00,000 with a GST of INR 1,80,000. The company can claim the full ITC of INR 1,80,000 if the machinery is used for taxable supplies.
2. Example 2: If the same machinery is used exclusively for exempt supplies, no ITC can be claimed.

Conclusion and Recommendations

• Key Points :

  • ITC on capital goods is available in full for taxable supplies.
  • ITC is reduced by 5% per quarter if capital goods are used for exempt supplies.
  • Depreciation claimed on the tax component disallows ITC on that portion.
  • Capital goods can be sent for job work without reversing ITC, subject to conditions.

• Recommendations  :

  • Maintain accurate records and ensure compliance with GST rules.
  • Regularly review case laws and updates in GST provisions to optimise ITC claims.

In summary, understanding and applying the rules for availing ITC on capital goods under GST is essential for businesses to manage their tax liabilities effectively. Compliance with the provisions and staying informed about legal interpretations can help in maximising the benefits of ITC.