GST Input Credit on Capital Goods

GST Input Credit on Capital Goods

Today we shall explain through this article about the implications of considering availability of Input Credit on GST paid towards purchase of Capital Goods.

Currently businesses may be using many capital goods on which input tax credit is available. This article is for the portion of credit of GST paid on purchasing capital goods.

First let us understand what Capital Goods are:  Capital goods are assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services. For example, a stone screening machine used in mining industry is a capital asset for the Miner.

So then what is the difference between capital goods & other inputs?

You are using a screener to filter mined minerals like ore. You fill diesel to run the machine or incur expenses on the screener’s maintenance. These are your inputs.  The ore filtered is your final product.  The Screener is the capital good which helps you to achieve the desired ore.  Inputs are consumed while making the final product and are treated as business expenses as cost of production.

Capital goods are not consumed when the final product is made. They are not consumed in a single year of production. Therefore, they cannot be entirely deducted as business expenses in the year of their purchase. Instead, they are depreciated over the course of their useful lives. The business recognises part of the cost each year through accounting techniques as depreciation, amortization and depletion.

What is input credit on capital goods?

When we purchase anything, we are required to pay GST on it. Later, we can claim input tax credit on the GST paid on our purchases. Similarly, when we are purchasing any machinery for our factory/office, we will pay the applicable GST rate. This GST paid can be claimed as credit in the same way as inputs.  However, if we claim depreciation on the GST paid while purchasing the capital asset, we cannot claim input tax credit.

What is Common Credit?

This is very important to understand.  A business often uses the same assets and inputs for both business & personal use.

For example, Mr A is a freelance designer and blogger. He has a personal laptop which he also uses for his freelance work. He can claim the input credit of GST paid on purchase of laptop only to the extent it pertains to his freelance business.

Mr A has also purchased a special designing software. Since this pertains only to his business, he can claim full Input Tax Credit (ITC) on this.

Why is Common Credit important?

ITC is only available for business purposes. Many traders use the same inputs for both business & personal reasons. A taxpayer cannot claim any tax benefit of personal expenses.

Again, goods exempted under GST already enjoy 0% GST. ITC cannot be claimed for inputs used in such exempted goods as it will lead to negative taxation.  So, ITC on inputs for exempted goods will also be removed.

Types of ITC for Capital Goods

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.

B. Capital Goods used for normal sales

If we have purchased a machinery to manufacture or produce goods that are normal taxable supplies the GST included paid while purchasing machinery will be completely available as ITC.

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

The total amount of input tax credited to electronic credit ledger for the whole useful life will be distributed over the useful life.  If you pay GST on a monthly basis or quarterly basis based on your turnover, the apportionment of credit will be done over the useful months or quarters in those 5 years.

Calculations for Common Credit

C.1 For exempted supplies

The amount of ITC attributable to exempt supplies turnover as a part of total turnover will be adjusted from common capital credit and balance shall be allowed as ITC.  All the above calculations must be done separately for: Central tax, State Tax, Union Territory Tax & Integrated Tax

C.2 What happens if one starts using an asset for exempt goods also for taxable goods?

If a capital asset was earlier used exclusively used for Personal purpose OR Selling of exempted goods and now it will is used commonly for business & personal or effecting taxable and exempt supplies, the Common credit at the time of original purchase will be reduced by 5% of the Common credit as a multiplier of quarters completed from the date of original purchase.  And thereafter the resultant balance common credit will be adjusted for turnover of exempt supplies over total turnover for the balance of 5 years.

Reversal of credit under certain circumstances

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

a.     Where a normal taxpayer opts to pay tax under composition scheme or goods/services supplied by him become exempt

b.     In case of supply of capital goods or plant and machinery, on which input tax credit has been taken

c.     Every registered person whose registration is cancelled

Input tax credit involved in the remaining useful life in months shall be computed on pro-rata basis, taking the useful life as five years.

In case of sale of capital goods, if the amount determined above is greater than the tax on transaction value of such sale, then the amount determined as above will be added to output tax liability.

Capital goods send on job work

ITC will be allowed to the principal manufacturer if a capital asset has been sent to a job worker for job work on condition that such goods must be received back within a period of 3 years of being sent out.  If the goods are not sent back within 3 years, it shall be treated as a deemed supply from the date of sending the goods and tax would be payable along with interest for late payment of taxes.

From the above calculations, it is clear that ITC Rules for Common Credit under GST have been meant to be followed strictly to avoid interest and other recovery mechanisms.

Conclusion:

It is also clear that claiming input credit on GST can be complex where the capital goods are used both for personal and business use AND between supply of taxable and exempt goods.  One should be careful enough to discuss capital procurements with one’s Chartered Accountant in order to assure the business is in abeyance of the GST rules.

For any queries please fee to write to us on info@gjmco.com

Thanks & Best regards,

Knowledge Base Team

GJM & Co.

Chartered Accountants

www.gjmco.in