ITC Rules for Capital Goods Under GST

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GST Services

• GST Registration
• GST Audit
• GST Return Filling
• GST Cancellation
• GST Registration for Foreign Companies
• GST Registration for New Assessee

What is ITC?

ITC, also known as Input Tax Credit, is the credit which a manufacturer receives for the payment of input taxes towards inputs used in the manufacture of products and a dealer receives the same in case of resale of purchased goods. Although input tax credit is not applicable on all types of inputs and each state has its own rule and regulation. Input tax credit is applicable on VAT, service tax, capital goods.

In simpler words, in case you are a manufacturer and total tax payable on final product is RS 450 and you have paid tax on your input is Rs 300. So in this case, you can claim input credit of Rs 300 and you only need to pay Rs 150 tax on it.

ITC is applicable on purchases such as:

1. Sale or resale within the state;
2. Used for making 0-rates sales;
3. Used as capital goods while manufacturing or reselling the taxable goods;
4. Goods used in the execution of work contracts;
5. Goods which are used as capital goods, while manufacturing or reselling the taxable good;
6. Goods which are used as raw materials, consumable stores or containers, or packing materials to be sold anywhere in India or abroad.

However, one cannot claim input tax credit on below mentioned purchases:

1. Goods bought from unregistered dealers;
2. Goods without an invoice;
3. Goods purchased from abroad;
4. Interstate good purchases;
5. Goods purchased with an invoice, however it has no mention of tax amount on it;
6. Goods purchased for free or has been received as a gift or for personal consumption;
7. Goods purchased for manufacturing exempted goods other than exports;
8. Goods listed under negative list by the respective state governments.

What Are Capital Goods?

Those goods which are used by a company to produce consumer goods are classified as capital goods. Also, capital assets are tangible assets which a company owns such as buildings, machinery equipments, vehicles and tools and uses as an input to produce the consumer goods. Also, the manufacturers of sectors such as automobiles, aircraft and machinery fall under capital goods because they are used by manufacturing and shipping sectors to produce other goods and services. Capital goods are not always the fixed assets like mentioned above. A simple example of movable capital goods is hair clipper used by the hair stylists, paint used by the painters etc.

Capital goods are not consumed when their job is done i.e. when the product you intended to produce through it is ready. For example, if you intend to make a cake, you would use ingredients such as eggs, water, flour and butter and a microwave/oven. Here, the microwave/oven you have used to make the cake is your capital good. So, going by its definition and usage, capital goods are not used and consumed in a single year of production and thus they cannot be deducted as business expense in a single year itself and thus the business uses various accounting techniques such as depreciation, amortization and depletion to evaluate the wear and tear of capital goods.

What is GST?

Goods and Services Tax, infamously known and used as GST, was introduced in India on 29th March 2017 and was implemented pan India on 1st July 2017. The main aim behind implementation of GST was to replace entire indirect taxes on supply of goods and services and have rather just one indirect tax i.e. GST. Under GST structure, GST tax is applicable at every point of sale which makes it a comprehensive, multi-stage, destination-based tax which is levied on every value addition. Introduced to remove various indirect taxes levied on goods and services, GST synchronizes with Digital India anthem of the government because it is a technologically driven tax wherein activities such as registration, return filing, refund application form and various other actions can be done online on the GST portal. GST aims to curb the inflation in the longer run and has various advantages over previous tax regime such as removing the cascading tax effect, online procedure, increased logistics efficiency, regulating the unorganized sector, lesser compliances, simpler tax structure and system, higher threshold for registration.

Input Tax Credit in GST

After the implementation of GST, input tax credit mechanism is applicable when you are covered under the GST Act i.e. when you are paying anything, you have to pay applicable GST on it, however, later on you can claim input tax credit on the GST you have paid on your purchase. For example, if you have bought laptop for your work as a nutritionist and wedding photographer, you have to pay the applicable GST on the laptop. However, you can claim the input tax credit of GST paid on the purchase of laptop only to the extent it pertains to her freelance business.

In case you have bought any specific software for your business, you are entitled to claim full input tax credit on it.

Documents required for claiming Input Tax Credit

In order to claim input tax credit, you need to have following documents in order:

• Invoice issued by supplier of goods or services or both.
• Debit note issued by the supplier.
• Document issued by the input service distributer.
• Revised invoice.
• Bill of entry or similar document as per the Customs Act.
• Invoice issued by recipient along with proof of payment of tax.

In order to claim input tax credit on Capital goods:

• You must be a registered taxable person.
• Goods and services are being used only for the business purpose.
• Supporting documents such as debit note, tax invoice etc is in order.
• All GST returns are duly filed.

Input Tax Credit on Capital Goods Under GST

Input tax credit on the capital goods is dealt by Rule 8 of the ITC. While you claim input tax credit under GST, you need to cover the following points:

• The goods or services should be received.
• The supplier has filed GST return.
• Amount which is charged in form of tax by the supplier should be paid to the government in cash or via claiming input tax credit.
• The mentioned goods or services should be received.
• Capital goods for personal use or for exempted sales:
  • In case you have made a purchase for your personal use or the item is listed under exempted sales, you cannot claim any input tax credit on the same.
  • For example, if you have bought television, which is not required for your business. You cannot claim any input tax credit on the GST you have paid for the television.
• Capital goods used for normal sales:
  • In case you have bought machinery or goods listed under normal sales, you can claim full input tax credit on the GST paid on the same.
• Common credit for partly personal/exempted and partly normal sales:
  • In this case, wherein the goods purchased falls under partly personal/exempted and partly normal sales, life of the asset will be counted as 5 years from the date of its purchase. Also, the input tax credit will be credited to the electronic credit ledger.
  • Total amount of input tax credited to the electronic credit ledger is known as common ledger, which can be calculated in the following manner:
    
    • Credit for tax period = ITC credited to electronic Credit Ledger / 5* 12 month
  • Tax period shall be every month.
  • Calculation must be done separately for Central Tax, State Tax, Union Territory Tax and Integrated Tax.
• In case you have an unclaimed input credit i.e. in case tax on your purchase is more than the tax on its sale, you can either carry it forward or claim for refund.
• You cannot claim input tax credit on purchase invoices which are more than one year old. This period is counted from the date mentioned on the invoice.

GST comprises of four segments namely: Central Goods and Services Tax (CGST) which is also known as central tax; State Goods and Services Tax (SGST) which is also known as state tax; Union Territory Goods and Services Tax (UTGST) which is also known as Union Territory Tax and Integrated Goods and Services Tax (IGST) also known as Integrated tax. Input Credit tax on the above mentioned segments is calculated in the following manner: Input Credit tax on the above mentioned segments is calculated in the following manner:

1. Input credit of Central Goods and Services Tax: In this case, payment is allowed first for CGST and in case of any balance, payment of IGST is allowed. Input credit of CGST cannot be used for the payment of SGST.
2. Input credit of State Goods and Services Tax / Union Territory Goods and Services Tax: In this case, payment is first allowed for the payment of SGST/UTGST and in case of any balance, it is utilized for the payment of IGST. Input credit of SGST/UTGST cannot be used for the payment of CGST.
3. Input credit of IGST: In this case, payment is first allowed for the payment of IGST and in case of any balance, it is first used for the payment of CGST and then for the payment of SGST/UTGST.