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How To Migrate If Registered As Composition Dealer/ Supplier/ Seller?
July 15, 2018

" ITC for Capital Goods under GST "

What are capital goods?

Capital goods are assets that are used to produce other goods or services such as buildings, machinery, equipment, vehicles and tools etc.

For example, commercial aircraft is a capital good because it is used by airlines to produce a service, transportation.

As per Section 2(19) of the Central Goods and Services Tax (CGST) Act, 2017, unless the context otherwise requires, the term ‘capital goods’ means goods, the value of which is capitalized in the books of accounts of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

Thus, Goods will be regarded as capital goods if the following conditions are satisfied:

(a) The value of such goods is capitalized in the books of account of the person claiming input tax credit.

(b) Such goods are used or intended to be used in the course or furtherance of business.

Capital goods are depreciated over the course of their useful lives. The business calculates the depreciation value each year through accounting techniques such as depreciation, amortization and depletion.

On every purchase, one is required to pay GST and later, one can claim Input Tax Credit on the GST paid on the purchases. However, if depreciation is charged on the GST paid while purchasing the capital asset, input tax credit cannot be claimed.

 Input Tax Credit Rules in case of capital goods:

Rule 8 of the ITC rules deals with ITC in case of capital goods.

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

Under this, no ITC is available and this has to be indicated in FORM GSTR-2. Also, the amount of ITC shall not be credited to the electronic credit ledger.

  1. A person has purchased a chair for his personal use. Therefore, he will not be able to claim any ITC on the GST paid for the chair.
  2. Ms. Vedika has purchased a small oil extracting machine in her shop to extract oil from seeds. Since she is producing unbranded oil, it is exempted from GST. And therefore, she cannot claim any ITC on the GST paid for the machine.

2. Capital Goods used for normal sales

Mr. Kunal has purchased machinery to manufacture clothes. Since, clothes 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. 

 

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

ITC in case of capital goods used commonly for exempt and taxable supplies and/or business and non-business purposes, shall be claimed as under:

  • The total amount of ITC shall be credited to the electronic credit ledger.
  • Useful life of such capital goods shall be taken as 5 years from the date of purchase.
  • The total amount of input tax credited to Electronic Credit Ledger is called as “Common credit”. This common credit shall be distributed over the whole useful life of the capital goods.

In case, GST paid on a monthly basis, following formula is used to calculate ITC –

Input tax credit for one month = ITC credited to Electronic Credit Ledger / 60(5 years * 12 months)

If your turnover is less than 1.5 crore, then GST is paid on a quarterly basis. ITC will be calculated using the following formula-

Input tax credit for one quarter = ITC credited to Electronic Credit Ledger / 20(5 years * 4 months)

  1. The amount of common credit attributable towards exempted supplies is calculated as under:

ITC attributable to exempted supplies =   (Value of exempted supplies/ Total Turnover) * Credit for a tax period. 

Remaining amount after deducting credit for exempt supplies will be allowed as ITC.                   

  1. In case, where any capital goods was initially used exclusively for non – business purpose or for effecting exempt supplies, but later used commonly for business and non-business purpose and for effecting taxable and exempt supplies, ITC to be credited to the electronic ledger shall be as under     

ITC = Input Tax – 5% of Input tax for every quarter or part thereof from date of invoice

Example

XYZ Ltd bought machinery for use in exempt supplies only. He paid Rs ₹2, 00,000 along with GST of ₹36,000 as input tax on 1st October 2017. On 15th November 2019, he wishes to use the machinery commonly for both taxable and exempt supplies.

Now the eligible common input tax credit will be calculated as follows –

= Input Tax – 5% of Input tax for every quarter or part thereof

The no. of quarters from 1st October 2017 to 15th November 2019= 5

= ₹36,000 – (5% of 36000) * 5 quarters

= ₹36,000 – 9,000

= ₹27,000

Now, this is the common credit available to XYZ Ltd. It will credit Rs ₹27,000 to Electronic Credit ledger.

Now XYZ Ltd will calculate the ITC attributable to exempted supplies as per the formula –

ITC attributable to exempted supplies =   (Value of exempted supplies/ Total Turnover) * Credit for a tax period.                 

Common credit for 1 month= ₹27,000 ÷60=₹450

Assuming his total turnover is 320 lakhs and exempted sales is 80 lakhs-

ITC attributable to exempted supplies = (80/320)*450 = ₹112.5

This amount 112.5will be reversed in GST- 2 under Table 11 ITC Reversal.

Reversal of ITC in case of capital goods

In the following circumstances the proportionate ITC will be reversed i.e. added to output tax liability in GSTR-2:

  • Where a normal taxpayer opts to pay tax under composition scheme or goods/services supplied by him become exempt – FORM GST ITC-03
  • In case of supply of capital goods or plant and machinery, on which input tax credit has been taken
  • Every registered person whose registration is cancelled –FORM GSTR – 10

This must be accompanied by a certificate from a chartered accountant.