Numerous capital goods are used by organisations on which they claim an input tax credit (ITC). Special provisions are applicable for taxpayers' capital goods for taxable and exempted supplies. This article reveals the proportion of credit for GST paid at the time of buying capital goods and the formulas of the input tax credit as per GST.
As per section 2(19) of the Central Goods and Service Tax Act 2017, “capital goods” are referred to as goods, the value of which can be capitalised in the accounts of the person who is claiming the ITC and that are applied or intended to be applied during business activities. In This blog post we will provide a comprehensive guide on the ITC rules for capital goods under GST, including the definition of capital goods, eligibility criteria for claiming ITC, documentation requirements, and other important considerations.
Latest Update of ITC Rules for Capital Goods Under GST
The rules for claiming Input Tax Credit (ITC) on capital goods have seen significant changes in recent times. Let’s break down the key updates:
Stricter ITC Claiming
- No more guesswork: You can only claim ITC if your supplier has reported the sale in their GST return, and this information is reflected in your GSTR-2B. The days of estimating ITC are over.
- Tightened timelines: You have a specific timeframe to claim ITC on invoices – either by November 30th of the following year or when you file your annual return, whichever comes first.
Overhauled ITC Process
- Simplified system: The complex process of claiming provisional ITC has been removed. Now, you self-assess your eligible ITC based on the information available.
- Clearer guidelines: The rules for claiming ITC have been clarified, making it easier to understand what you can and cannot claim.
Key Dates to Remember
- December 29, 2021: The option to claim an additional 5% ITC over and above the GSTR-2B amount was removed.
- January 1, 2022: The new ITC rules, including stricter claiming and removal of provisional ITC, came into effect.
- February 1, 2022: The budget introduced further changes to ITC rules, aligning them with the GSTR-2B and setting stricter timelines for claiming ITC.
These changes aim to improve transparency and accuracy in ITC claims, reducing the scope for discrepancies and tax evasion. Businesses need to adapt their processes to comply with these new rules and ensure timely and correct ITC claims.
What are Capital Goods?
Capital goods are tangible assets used by businesses to produce other goods or services. They are essentially the tools of the trade, helping businesses create the products and services we use every day. Think of them as the building blocks of production.
Here are some key characteristics of capital goods:
- Durability: They are meant to last for a long time, often years or even decades. Examples include machinery, buildings, and vehicles.
- Productivity: They help businesses increase their output and efficiency. For instance, a factory might invest in new machines to produce more widgets per hour.
- Investment: They require a significant upfront investment, which can be financed through various means like loans or retained earnings.
Here are some common examples of capital goods:
- Machinery and equipment: This includes everything from factory robots to office computers.
- Buildings and infrastructure: This could be anything from a factory building to a power plant.
- Vehicles: This includes trucks, delivery vans, and even airplanes used for transportation.
- Software and technology: This includes things like computer programs and data analysis tools.
Discussion About Capital Goods and Other Inputs
The goods used to create a final product are input goods. Input goods are numerous products combined to make an overall product. It could also be considered a material used in the product’s manufacture. The expenses included in manufacturing these input goods should be regarded as business costs.
Capital goods are considered a product that supports the finishing of the final product and makes it ready for shipping. Because several capital goods require more than a year to consume, expenses may not be considered business costs for the year. The deduction is available at the end of the product’s prescribed usage life.
Input Tax Credit on Capital Goods
According to Section 16 of the CGST 2017, ITC can be claimed by anyone registered for GST. The registered individual could obtain ITC for business expansion or other objectives associated with the organisation. When capital goods are used solely for business purposes, the ITC should apply under GST. The taxpayer must record the business transactions when filing the GST return to claim ITC on capital goods.
Though ITC is not available on capital goods applied exclusively by exempt suppliers or on capital goods uused solely for personal purposes, if GST were applied at a nil rate for the goods supplied, taxpayers would be unable to claim ITC for the same. It is also applicable to exempted goods. As a result, a taxpayer may claim ITC on capital only if it is used for taxable sales and is recorded in the taxpayer’s books.
The taxpayer uses ITC Computation on Capital Goods. Any capital goods (regarding ITC) for non-business purposes in an exclusive manner, which is recorded in the transactions. They shall be indicated in forms GSTR-2 and GSTR-3B. In the electronic credit ledger, the amount shall not be credited.
The taxpayer uses any capital goods (regarding ITC) for effecting taxable supplies exclusively involving zero-rated supplies, which are recorded in the transactions. They shall be indicated in form GSTR-2 and Form GSTR-3B. In the electronic credit ledger, the amount shall not be credited. This shall apply according to Schedule II, Paragraph 5(b) of the same Act and as per Rule 43(1)(b) of the CGST Rules.
The five-year life is used for the capital goods not covered under (a) and (b) clauses and is reflected as A. The amount should be credited to the electronic credit ledger.
- If similar capital goods are included under clauses (a) and (c), the value “A” may be computed by the taxpayer through the deduction of the input tax at 5% for each quarter. After the deduction of the ITC, the value shall be included in the electronic credit ledger
- If the taxpayer’s capital goods are included under these clauses, the need for ITC reversal under section 18(4) of the CGST Act 2017 does not apply because the ITC has already been deducted.
Any amount connected to “A” credited in the electronic credit ledger shall be reflected as “Tc. If the same capital goods were applied by the taxpayer included under clauses (b) and (d), the value “A” could be computed through the deduction of the input tax at a rate of 5% for each quarter and then added to the total value of “Tc.” This should apply to goods initially applied only for taxable supplies but subsequently applied for exempted supplies.
Difference Between Capital Goods & Other Inputs
Imagine baking a cake. The flour, eggs, and sugar you use up are like inputs. Once they’re mixed into the batter, they’re gone. These are everyday business expenses.
On the other hand, your oven is a capital good. It helps you make the cake, but it doesn’t disappear after one use. It’s an investment that lasts for many cakes. Unlike inputs, you can’t claim the full cost of an oven as an expense in one year. Instead, you gradually deduct its value over time through depreciation.
So, while inputs are consumed to create a product, capital goods are tools that aid in production but retain their value over time.
What is Common Credit?
Common credit happens when you use something for both work and personal life. For example, if you’re a freelancer who uses their personal laptop for work, you can’t claim the full GST paid on the laptop as a business expense.
Imagine your laptop as a pizza. The part you use for work is like the cheese and pepperoni – clearly for business. But the rest of the pizza is like the crust – shared between work and personal life. That shared part is the “common credit”.
You can only claim GST credit for the “business” part of the laptop. Figuring out how much is for business and how much is personal can be tricky, so it’s important to keep good records.
Claiming ITC on Goods: Procedure and Guidelines
Claiming ITC on the GST you paid for business purchases is essential for optimising your tax liability. Here’s a breakdown of the process:
Gather Your Documents
- Collect invoices: Keep all invoices related to your purchases. Ensure they include GSTIN, total amount, and GST charged.
Verify Your Suppliers
- Check GSTIN: Make sure your suppliers have a valid GSTIN and are tax compliant.
- Confirm tax payment: Verify that your suppliers have paid the collected GST to the government.
Confirm Goods Usage
- Business purpose: Ensure the purchased goods are used exclusively for business activities.
- Eligibility check: Confirm the goods qualify for ITC as per GST rules.
Time Your Claim
- Claim on time: Claim ITC in the same tax period when you receive the goods.
- Adhere to deadlines: Follow the specified time limits for claiming ITC.
Keep Detailed Records
- Organised records: Maintain a comprehensive record of all purchases and ITC claims.
- Use accounting software: Consider using software to streamline record-keeping and simplify calculations.
Reconcile Regularly
- Compare records: Regularly match your purchase records with the ITC claimed in your GST returns.
- Address discrepancies: Correct any errors or mismatches promptly.
File Accurate Returns
- Complete and on time: File your GST returns accurately and within the due date.
- Include ITC details: Clearly report ITC claims in your GST returns.
Prepare for Audits
- Organised documentation: Keep all supporting documents readily available for potential audits.
- Stay updated: Stay informed about GST changes to maintain compliance.
By following these steps, you can maximise your ITC claims and ensure smooth GST compliance.
ITC Formula on Capital Goods
If the use of capital goods is done for business as well as personal purposes, then by using the following formula, ITC on the same can be computed:
- GST paid every month, less ITC on capital goods, less mixed-use
- ITC = ITC to electronic ledger divided by 60
- 60 are obtained by multiplying 5 years by 12 months.
- GST paid every quarter, less ITC on capital goods, less mixed-use
- ITC = ITC to electronic ledger divided by 20
- This 20 is obtained after 5 years*4 quarters.
Personal Use Converted to Mixed Use
The following formula is applied when the capital goods that were previously applied for personal purposes and subsequently used for business and personal purposes both –
Amount of Input tax included in electronic ledger = Input tax less 5% of ITC for each quarter or part thereof from the invoice date
Common ITC Assigned Towards Exempted Supplies
The following formula is used for common ITC assigned towards exempted supplies:
Step 1:
Credit for exempted supplies = (exempted supply value/total turnover) * credit for the tax period
Step 2:
Allowable ITC = Total ITC – Credit for exempted supplies
Reversal of Credit under Certain Circumstances
In the below-prescribed situations, ITC would be reversed in a proportionate manner, which means it is considered part of the output tax liability in the GSTR-3B.
- When the composition scheme is opted for by the average taxpayer or goods or services supplied by them become exempt, In the case of capital goods or plant and machinery supply, where ITC has already been taken
- Each registered person whose new GST registration is cancelled
- ITC included in the remaining useful life in months should be calculated on a pro-rata basis, considering the useful life as five years.
Capital Goods Transfer for the Job Work
The principal manufacturer can avail himself of the ITC if the capital goods have been sent for job work. However, such goods must be received back within three years of being sent out. If the goods are not received back in the prescribed time, they shall be considered a “deemed supply” from the date of sending the goods, and tax will be due in addition to interest for the delay in payment of taxes.
Why is Common Credit Important?
Common credit is a crucial concept in the Goods and Services Tax (GST) system implemented in India. It allows businesses to claim tax credits on the purchase of capital goods, which can then be used to offset their GST liability on sales. This essentially reduces the overall tax burden on businesses, making it easier for them to invest in capital goods and improve their operations.
Here’s how common credit works:
- When a business purchases capital goods, they pay GST on the purchase price.
- They can then claim a tax credit on this GST paid, which is known as common credit.
- This credit can be used to offset the GST liability on their sales of goods or services.
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The importance of common credit lies in its ability to:
- Boost investment: By reducing the tax burden on capital goods purchases, common credit encourages businesses to invest in new equipment and infrastructure, which can lead to increased productivity and economic growth.
- Improve competitiveness: Businesses with access to common credit can become more competitive by lowering their production costs and offering more competitive prices.
- Promote GST compliance: By providing a tangible benefit for complying with the GST system, common credit encourages businesses to register and file their returns accurately.
Overall, common credit plays a vital role in the Indian GST system by supporting businesses, promoting economic growth, and ensuring compliance.
Types of ITC for Capital Goods
There are two main types of input tax credit (ITC) available for capital goods under GST:
- ITC on purchase of capital goods: This is the most common type of ITC, and it allows businesses to claim credit for the GST they pay on the purchase of capital goods. The amount of ITC available depends on the type of capital good and the rate of GST that applies.
- ITC on lease of capital goods: This type of ITC is available to businesses that lease capital goods instead of buying them. The amount of ITC available is equal to the GST paid on the lease rentals.
In addition to these two main types of ITC, there are also a number of other provisions in the GST law that allow businesses to claim ITC on capital goods. These provisions are complex and vary depending on the specific circumstances, so it is important for businesses to seek professional advice to ensure that they are claiming all of the ITC that they are entitled to.
Conclusion
Organisations have observed numerous effects since the implementation of the GST. Individuals should register under the GST to claim ITCs from their purchases. Individuals must provide adequate details for claiming input tax credits on capital goods.
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FAQs on ITC on Capital Goods under GST
Can we claim ITC on capital goods under GST?
Yes, you can claim ITC on capital goods purchased under GST, but with certain conditions:
The capital goods must be used for making taxable supplies (goods or services).
ITC cannot be claimed if depreciation has been claimed on the tax component of the capital goods.
You must have a valid GST registration and GST Return Filing
ITC can only be claimed on the GST paid on the purchase invoice.
What is rule 43 ITC on capital goods?
Rule 43A of the Central Goods and Services Tax Rules, 2017, deals with the reversal of ITC on capital goods in case of certain situations:
If the registered person shifts from the regular scheme to the composition scheme.
If the goods or services for which the capital goods were used become exempt.
If the capital goods are disposed of before the full useful life is exhausted. The amount of ITC to be reversed is calculated based on the remaining useful life of the capital goods.
What are the rules for GST ITC claim?
In addition to the specific rules for capital goods mentioned above, the general rules for claiming ITC under GST apply:
The ITC must be reflected in the supplier's GSTR-1 and your GSTR-2B return.
You must have proper invoices and records supporting the purchase of the capital goods.
You cannot claim ITC on purchases used for personal purposes or exempt supplies.
Can we take input credit on fixed assets under GST?
Capital goods are considered fixed assets, and yes, you can take ITC on them under GST, subject to the conditions mentioned above.
Can we claim 100% ITC on capital goods?
Generally, you can claim 100% ITC on capital goods if they are used solely for making taxable supplies. However, certain sectors like textiles and leather have restrictions on ITC claim percentages. It's best to consult a tax professional to confirm the specific rate applicable to your business.
Are capital goods sold under GST?
Yes, capital goods are subject to GST when sold. The GST rate applicable depends on the specific type of capital goods.
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