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.
By Tanvi Loond
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
- 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).
- Tanvi Loond is Founder and CEO, InstaCA.in, an online tax and accounting service for SMEs and startups.