ITC of capital goods

Are you using capital goods for taxable supply ?

*Subject to the provisions of sub-section (3) of section 16, the input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-

the amount of input tax in respect of capital goods used or intended to be used exclusively for non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall be indicated in FORM GSTR-2 and shall not be credited to his electronic credit ledger;

the amount of input tax in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero-rated supplies shall be indicated in FORM GSTR-2 and shall be credited to the electronic credit ledger;

the amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as ‘A’, shall be credited to the electronic credit ledger and the useful life of such goods shall be taken as five years from the date of invoice for such goods
Provided that where any capital goods earlier covered under clause (a) is subsequently covered under this clause, the value of ‘A’ shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof and the amount ‘A’ shall be credited to the electronic credit ledger; Explanation: An item of capital goods declared under clause (a) on its receipt shall not attract the provisions of sub-section (4) of section 18 if it is subsequently covered under this clause.

the aggregate of the amounts of ‘A’ credited to the electronic credit ledger under clause (c), to be denoted as ‘Tc’, shall be the common credit in respect of capital goods for a tax period:
Provided that where any capital goods earlier covered under clause (b) is subsequently covered under clause (c), the value of ‘A’ arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof shall be added to the aggregate value ‘Tc’;

the amount of input tax credit attributable to a tax period on common capital goods during their useful life, be denoted as ‘Tm’ and calculated as:-
Tm= Tc÷60

the amount of input tax credit, at the beginning of a tax period, on all common capital goods whose useful life remains during the tax period, be denoted as ‘Tr’ and shall be the aggregate of ‘Tm’ for all such capital goods

the amount of common credit attributable towards exempted supplies, be denoted as ‘Te’, and calculated as:
Te= (E÷ F) x Tr
where,‘E’ is the aggregate value of exempt supplies, made, during the tax period, and
‘F’ is the total turnover of the registered person during the tax period Provided that where the registered person does not have any turnover during the said tax
period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to calculated Explanation: For the purposes of this clause, the aggregate value of exempt supplies and total
turnover shall exclude the amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule

the amount Te along with applicable interest shall, during every tax period of the useful
life of the concerned capital goods, be added to the output tax liability of the person making such claim of credit

*The amount Te shall be computed separately for central tax, State tax, Union territory tax and integrated tax.

A. Capital Goods used only for Personal Use or for Exempted Sales

No ITC is available for personal purchases or for capital goods used in exempted sales. This will be indicated in FORM GSTR-2 and shall not be credited to the electronic credit ledger.

Example 1: Personal Purchases

Ms. Anita has purchased a fridge. Since this is not required for her business, i.e., a purely personal purchase, she will not be able to claim any ITC on the GST paid for the fridge.

Example 2: Capital Goods used for exempted sales

Mr. Avinash has purchased a small flour mill in his grocery shop to grind wheat grains to flour. Since he is producing unbranded flour it is exempted from GST. As it is an exempted sales, he cannot claim any ITC on the GST paid for the mill.

 

B. Capital Goods used for normal sales

XYZ has purchased machinery to manufacture shoes. Since, shoes are normal taxable supplies, the GST included paid while purchasing machinery will be completely available as ITC. This shall be indicated in FORM GSTR-2 and shall be credited to the electronic credit ledger.

C. Common credit for partly personal/ exempted and partly normal sales

The ITC paid for the capital goods will be credited to electronic credit ledger

Useful life of such capital asset will be taken as 5 years from the date of purchase

Now the total amount of input tax credited to electronic credit ledger for the whole useful life will be distributed over the useful life

The useful life will be taken as 5 years.