Capital Goods and its GST implication

There are 3 categories of Inward supply of which an Assessee can claim ITC (Input Tax Credit) namely – Inputs, Input services and Capital Goods.

Here, we shall be discussing about various aspects of Capital Goods under GST Law and the eligibility of an Assessee to claim ITC on Capital Goods and the scenarios where reversal of such TC is required or its subsequent Refund from Electronic Credit Ledger.

• First of all, we need to understand that - what does the term ‘Capital Goods’ means?

The term Capital Goods has been defined under Section 2(19) of CGST Act, 2017 and it represents–

• Goods whose value is Capitalized in the Books of Account of the person claiming the input tax credit (ITC).
   [i.e. the person who has Purchased the said Capital Goods must have capitalised it in its Books of Accounts]

AND

• Goods which are used or intended to be used in the course or furtherance of business.
   

• After identifying the capital goods, an Assessee must analyze - when can he claim ITC on its purchase?
   

5. Section 16 of CGST Act, 2017 states eligibility of a Registered Person to claim ITC.

As per Section 16(3), a Registered Person cannot claim ITC on the tax component of Capital Goods if he is claiming Depreciation (under the provisions of Income Tax, 1961) on the same.

• Interpretation - It means, on the contrary, that if he is NOT claiming Depreciation on the tax component, then he can claim ITC on the same.

Thus, it leads to the fact that an Assessee can either claim ITC OR Depreciation on the tax component of the Capital Goods purchased.

It is interesting to note that the Assessee has to claim Depreciation over multiple years (i.e. over the useful Life of the Asset) on the tax component of Capital Goods. BUT, on the contrary,  he can claim the full amount as ITC in the first year only if he is NOT claiming Depreciation on it.
The same benefit, which can be availed at a time, has been spread over multiple years causing delay in utilizing benefits.

Also, if an Assessee charges Depreciation on tax component (say 30%) in ‘Statement of Profit & Loss’, then he is getting a benefit of cash savings in the form of reduced taxes by the amount of Deprecation i.e. 30% only, in first year.
But if he claims ITC, he is getting the entire 100% benefit of cash savings in the form of reduced taxes under GST.

The same can be understood through an Example.

• Example: Suppose an Assessee has purchased an Asset for Rs 1,00,000 and over which Tax has been paid amounting to Rs 20,000. Rate of Depreciation is 10%.

Case 1: Tax has been Capitalised
Value of Asset that shall be capitalised in the Books is Rs 1,20,000 (1,00,000 + 20,000) which includes both the purchase price and the tax component.

Depreciation shall be charged on Rs 1,20,000 @ 10% which shall be amounting to Rs 12,000. Out of this, Rs 10,000 represents Depreciation on the purchase price and Rs 2,000 represents Depreciation on the tax component.

Since the amount of Tax has been capitalised, Assessee cannot claim ITC of this amount.

Case 2: Tax has NOT been Capitalised
Value of Asset that shall be capitalised in the Books is Rs 1,00,000

Depreciation shall be charged on Rs 1,00,000 @ 10% which shall be amounting to Rs 10,000 i.e. only on the purchase price and not on the Tax component.

BUT, the Assessee can claim ITC on the Tax component.

Conclusion: In Case 1, Assessee is getting an additional benefit of Rs 2,000 (Depreciation on Tax component) in the form of Depreciation due to which his profit shall be reduced and as a result, he is liable to pay a reduced amount of tax on his Net Profit under Income Tax Act. But, he is not getting any benefit of ITC.

On the contrary in Case 2, he is foregoing his benefit of increased Depreciation and utilising the entire amount of Rs 20,000 as ITC against his output Tax and thus reducing his total tax payable.

In Case 1, the benefit of tax component has been spread over the useful life of the Asset in the form of Depreciation. While in Case 2, it has been utilised in same year itself.

• It is interesting to note that the above provisions do NOT hold good for Banking companies. They has to follow the provisions of Sections 17 as discussed below:
   

5. Section 17(4) of CGST Act, 2017 provides 2 options for a banking company or a financial institution including a non-banking financial company (engaged in supply of services by way of accepting deposits, extending loans or advances) –
    

• Avail Credit as per Section 17(2) i.e. avail Credit of Taxable supplies when the registered person is supplying both Taxable and Exempt supplies using goods or services or both.
  [Here, Taxable supplies included Zero Rated supplies]

OR

• Avail 50% of eligible Credit of Inputs, Input Services and Capital Goods. The REST shall be LAPSED.

The option once exercised shall not be withdrawn during the remaining part of the Financial Year.

BUT, the restriction of fifty per cent shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.

• After identifying the eligibility of the Assesse to claim ITC on Capital Goods, we must understand that when can an Assesse is eligible to claim/liable to reverse ITC on Capital Goods on the following cases:
   

5. Section 18 of CGST Act, 2017

• In case an Assesse has become liable to pay Tax under Section 9 (Normal scheme) by ceasing to pay Tax under Section 10 (Composition scheme), then Section 18(1)(c) allows him to claim Credit on Capital Goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9.
   

[It means that in case an Assesse is shifting from Composition scheme to Normal scheme, he is eligible to claim ITC of Capital Goods on the day immediately preceding the date of conversion]

• Example: An Assesse has shifted to Normal scheme from Composition scheme on 04/05/2021. Then, he can claim ITC on Capital Goods available on 03/05/2021.

• A Registered person can claim Credit on Capital Goods in case when the supply of Goods or services or Both made by him becomes Taxable (the supply was previously Exempt and now has become Taxable).
  Section 18(1)(d) allows him to claim Credit on Capital Goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes Taxable.
   

• Example: The supply made by an Assesse was Exempted. But it has become Taxable on 04/05/2021. Then, he can claim ITC on Capital Goods available on 03/05/2021.

• As per Section 18(4), a Registered person who has availed ITC, and –

• • Opts to pay tax under section 10 (Composition scheme)

OR

• • where the goods or services or both supplied by him become wholly exempt

shall pay an amount equivalent to the credit on capital goods on the day immediately preceding –
 

• • date of exercising of such option

OR

• • date of such exemption
     
• Interpretation: It means that in case an Assesse, after claiming ITC on Capital goods, has opts to pay tax under Composition scheme, then he has to reverse the ITC on capital goods available on the date immediately preceding the date of exercising Composition scheme.

Similarly, if the supply made by an Assessee becomes wholly Exempt (from being Taxable), then he has to reverse the ITC on capital goods available on the date immediately preceding the date of such exemption.

• Section 18(6) states that in case of supply of capital goods by a Registered person, on which input tax credit has been taken, an amount is required to be paid by him which is equivalent to HIGHER OF –
   
  • Input Tax Credit taken on the said capital good

OR

• • the tax on the transaction value of such capital goods as determined under section 15

• It is interesting to note that in case where an Assessee sends its Capital Goods to a Job Worker, then he needs to follow certain more provisions of the Section 19 and Section 143 (in addition to above) as discussed below:
   

5. Section 19 of CGST Act, 2017

• Section 19(4) allows the Principal to claim input tax credit on capital goods sent to a job worker for job work

• Section 19(5)  surpasses conditions of Section 16(2) and enables the Principal to claim input tax credit on capital goods even if the capital goods are directly sent to a job worker for job work without being first brought to his place of business.
   
• As per Section 19(6), in case the capital goods sent for job work are NOT received back by the principal within three years, then it shall be considered as Deemed Supply on the day when the said capital goods were sent out.
  
  In case the capital goods are sent directly to a job worker, the period of three years shall be counted from the date of receipt of capital goods by the job worker.
   

5. Section 143 of CGST Act, 2017

• In case a Registered Person has sent capital goods to a job worker for job work (without payment of tax), then he shall bring back the same after completion of such job work.
   
• The same is required to be brought back within 3 years of being sent out, otherwise it shall be deemed that such capital goods had been supplied by the principal to the job worker on the day when the said capital goods were sent out.
   
• The Registered Person shall supply such capital goods within three years of being sent out from the place of business of a job worker. It shall be supplied on payment of tax within India, or with or without payment of tax for export.
   
• The said provisions are NOT applicable to moulds and dies, jigs and fixtures, or tools.
   
• The Principal can supply such capital goods from the place of business of the job worker, in case he declares the same as his additional place of business.
  
  The same is NOT allowed in case –
  • where the job worker is registered under section 25 (Procedure for registration)

OR

• • where the principal is engaged in the supply of such goods as may be notified by the Commissioner
     

It is the responsibility of the Principal to maintain the proper Books of Accounts for such Capital Goods.

• The liability to reverse the ITC claimed on Capital Goods may also fall upon the Assessee if his REGISTRATION under GST gets CANCELLED. The same can be understood from the provisions of Section 29 as discussed below:
   

5. Section 29 of CGST Act, 2017

• As per Proviso to Section 29(5), a Registered person, whose Registration is Cancelled, is required to pay an amount equivalent to HIGHER of the following: -
   
  • Input Tax Credit taken on the said capital goods or plant and machinery, reduced by such percentage points as may be prescribed

OR

• • tax on the transaction value of such capital goods or plant and machinery under Section 15 (Valuation of Taxable Supply)

• Even after complying with all the discussed provisions, the Assessee must note that he cannot claim ITC if he uses Capital Goods for Non-Business purpose. The same can be understood from Rule 43:
   

5. Rule 43

In case the Assessee intends to use Capital Goods for Non-Business purpose OR exclusively for making Exempt supplies, then he is NOT eligible to claim ITC on the said purchase of capital goods.

Interpretation – It means that Assessee is only eligible to claim Depreciation on the Tax component over the useful life of the Asset as he is NOT eligible to claim ITC on it due to absence of Output Tax against it.

• After complying with all the relevant provisions, if an Assessee is having an ITC balance in his Electronic Credit Ledger, then he can follow the provisions of Section 54 which talks about the procedure of Refund of ITC under Electronic Credit Ledger
   

• An Assessee can claim Refund of ITC under Electronic Credit Ledger (under various cases like Inverted Duty Structure, Export without payment of Tax and Others) by following the procedures of Section 54 of CGST Act, 2017 and Rule 89.
   
• BUT, the Assessee cannot claim such Refund in case the accumulated balance in Credit Ledger is due to tax component of Capital goods.
   
• However, the Assessee can only claim Refund of accumulated Credit balance of Capital goods in case of Export with payment of Tax.

• Conclusion: The Assessee should analyze his business module first and then select the appropriate method of utilizing its tax component on Capital Goods in order to take the maximum benefits in the earliest possible time.