Determination and apportionment of input tax credit in respect of capital goods

(Critical analysis of Rule 43 of Central Goods and Services Tax Rules, 2017)

Input tax credit (the ITC) is the backbone of GST. In GST law as prevalent in India, on referring section 73 and section 74 of CGST Act, 2017 (the Act), one would appreciate that wrong availment of ITC is being treated as offence irrespective of it’s actual utilization. In this article, rule 43 of CGST Rules, 2017 (the Rules) has been thoroughly discussed and critically analyzed so as to enable every reader to use this article as a ready reference. Rule 43 talks about ITC in respect of capital goods, so reference to any section in this article has been modified accordingly to concentrate on capital goods only. There are certain errors in drafting of rule 43, which we see with the flow of discussion.

Issues to be analyzed

  1. Principles on the basis which rule 43 has been drafted – a technical analysis!
  2. Understanding rule 43 – an easy digest of a complex drafting!
  3. Express assumption taken by rule 43 – does it hold goods in all situations?
  4. Situations not dealt by rule 43- exploring the possible solutions!
  5. Law i.e. rule 43 vs. implementation thereof i.e. GSTR-3B
  6. Treatment of ITC in reference to sale of land or sale of complete building or sale of duty scrips – an opinion!

all above issues has been analyzed in this article at length at relevant places in form of discussion.

Emergence of rule 43 and principles embedded therein

Section 17(1) and section 17(2) are cause of creation of rule 43. Section 17(1) intends that ITC in respect of capital goods shall not be available to the extent these are used for non-business purposes. Similarly, section 17(2) intends that ITC in respect of capital goods shall not be available to the extent these are used for effecting exempt outward supplies.

So, rule 43 is based on following principles –

  1. If inward supply of capital goods is used for effecting taxable outward supplies then ITC shall be available in respect of such goods to the extent these are used for said purpose.
  2. If inward supply of capital goods is used for effecting zero rated outward supply then ITC shall be available in respect of such goods to the extent these are used for said purpose.
  3. If inward supply of capital goods is used for effecting exempt outward supplies then ITC shall not be available in respect of such goods to the extent these are used for said purpose.
  4. If inward supply of capital goods is used for non-business purpose then ITC shall not be available in respect of capital goods to the extent these are used for said purpose.

Since this a settled position of law that a rule cannot override the provisions of Act, so in addition to above, ITC in respect of those capital goods shall also not be available which falls within the scope of section 17(5). This point has been focused specifically because rule 43 is silent on ITC of such capital goods.

An express assumption taken by rule 43 (for commonly used capital goods)

a capital goods has a life of 5 years i.e. 60 months i.e. 20 quarters. So, ITC in respect of a capital goods shall be available over a period of 5 years/60 months/20 quarters. Rule 43 specifically uses 5% per quarter.

An implied intention of rule 43

When we compare rule 43 with rule 42, there is no provision for annual calculation in rule 42 as is there in rule 42. So, rule 43 has been drafted in such a manner that calculation of credit for a particular month must be accurate and final within that period itself.

In other words, it can be concluded that as soon as a tax period (i.e. month) is over, self-assessment of 1/60th of the credit is over. Now one doesn’t need to see this 1/60th part in next tax period(s). similarly, one can conclude that as soon a quarter is over, self-assessment of 5% is over. Rule 43 one step further clarifies that a part of quarter shall be treated as complete quarter.

Some other aspects relevant for understanding rule 43

One can take credit in respect of a capital goods as soon as four conditions as specified in section 16(2) are fulfilled, if otherwise is not ineligible for credit.

Let’s analyze above concepts

Situation-1 Suppose a capital goods was purchased and received on 20.07.2017 along with invoice of even date. IGST charged on invoice was Rs. 6,60,000. Till December 2017, it was being used for effecting exempt supplies. But from January 2018 to June 2018, it was used commonly for effecting taxable supplies, exempt supplies and for the purpose of business as well as non-business purpose. From July 2018 to September 2018, it was used exclusively for effecting taxable supplies.

Turnover type

January 2018 February 2018 March 2018 April 2018 May 2018 June 2018

Exempt

4 crores 5 crores 2.5 crores 4 crores 2 crores

3.5 crores

Non-business

1 lakh 1 lakh 1 lakh 1 lakh 1 lakh

1 lakh

Total 10 crores 15 crores 10 crores 20 crores 11 crores

12.25 crores

Since upto December 2017, it was being used for effecting exempt supplies, ITC would have not been taken upto December 2017.

Monthly proportionate ITC = Tax ÷ 60 = 6,60,000 ÷ 60 = 11,000

ITC finalized upto December 2017    = monthly proportionate ITC × number of months lapsed

=11,000 × (months from July 2017 to December 2017)

= 11,000 × 6 = 66,000

So, out of Rs. 6,60,000, self-assessment of ITC of Rs. 66,000 has become final. In other words, since it was being used from July 2017 to December 2017 (i.e. for 2 quarters) for effecting exempt supplies, proportionate amount of ITC i.e. Rs. 66,000 shall not be allowed.

Note: definition of quarter may have different impact in different situations (we will discuss this later in this article)

Now we will see treatment of remaining ITC of Rs. 5,94,000 i.e. 6,60,000-66,000.

For the month of January 2018, it was used for common purposes.

For this purpose, proviso to rule 43(1)(c) read with rule 43(1)(d) specifies that ITC in respect of commonly used capital goods (i.e. common credit) denoted by “A” [ or ƩA= Tc] shall be calculated as under –

Input tax on such capital goods                                                          6,60,000

Less: 5% for every quarter from date of invoice                                 66,000

(i.e., 6,60,000 × 5% × 2)                                                                   ——————

TC = ƩA                             5,94,000

Logically, if we exclude the proportionate exempt or non-business part from this Rs. 5,94,000, balance credit should be granted to the taxpayer.

When we move further, we see an error in drafting of rule 43. Let’s see this –

As per rule 43(1)(e), proportionate monthly common credit (denoted by Tm; Tm = Tc / 60) on such goods shall be Rs. 9,900 i.e. 5,94,000/60 but it should logically be Rs. 11,000 i.e., 6,60,000/60. However, treatment given in rule is beneficial for the taxpayer. Let’s see this –

Proportionate exempt part i.e. common credit attributable towards exempt supplies denoted by Te shall be calculated as under –

Te = (E÷F) × Tr

as specified in rules

logically

Te = (4÷10) × 9900 = 3,960

Te = (4÷10) × 11,000 = 4,400

Where Tr = Ʃ Tm

E = Exempt turnover for the tax period i.e. for January 2018 in our example

F = Total turnover for the tax period i.e. for January 2018 in our example

Calculation of ITC in respect of said capital goods for January 2018

Particulars

Remark / calculation Amount

(as specified in rules)

Amount (logically)

Amount to be credited in electronic credit ledger (i)

TC 5,94,000 5,94,000
**Amount to be added in output tax liability (ii) Te      3,960

    4,400

**Rule 43(1)(h) specifies that it shall be added to output tax liability along with applicable interest. however, it is important to note that no interest shall be levied on this amount because ITC on such goods has itself been taken in month of January 2018 itself.

Important to note here is that rule 43 is silent on proportionate non-business part i.e. common credit attributable towards non-business use. However, section 17(1) intends that if capital goods are used for non-business purpose then ITC shall not be available in respect of capital goods to the extent these are used for said purpose. Since Act shall prevail, it is a suggestion that while calculating exempt turnover for the tax period i.e. January 2018 in our example, non-business turnover shall also be added. In this way, a reasonable amount attributable towards non-business purposes shall also be added to output tax liability. Non-business turnover can be determined by applying valuation rules.

Calculation of ITC in respect of said commonly used capital goods from February 2018 to June 2018

Particulars

Remark / calculation February 2018 (as per rules) March 2018

(as per rules)

April 2018

(as per rules)

May 2018

(as per rules)

June 2018

(as per rules)

Tr (Rs.)

As per rules 9,900 9,900 9,900 9,900

9,900

+E (Rs.)

As per rules 5 crores 2.5 crores 4 crores 2 crores

3.5 crores

F (Rs.)

As per rules 15 crores 10 crores 20 crores 11 crores 12.25 crores

$ITC to be taken

Nil Nil Nil Nil Nil

*Amount to be added in output tax liability

Te = (E÷F) × Tr

(as per rules)

3,300 2,475 1,980 1,800 2,828.57

#Interest to be added

As per rules on amount added above From Jan-18 to Feb-18 From Jan-18 to Mar-18 From Jan-18 to April-18 From Jan-18 to May-18

From Jan-18 to Jun-18

+ as suggested, exempt turnover shall include non-business turnover also.

$ No need, because Rs. 5,94,000 has already been credited in electronic credit ledger in month of January 2018

*logically this amount should have been calculated based on Tr being Rs. 11,000 in place of 9900 which is as per rules.

# because ITC of Rs. 5,94,000 was taken in January 2018.

Presentation in GSTR-3B of January 2018

From here, it can be clearly seen that even if rules intend to add the amount in output tax liability but while implementing the law, amount is being reversed from ITC.

Now we come on July 2018.

From July 2018 and onward, said goods was used for taxable purpose, hence no separate treatment is required because ITC in respect of said goods has already been taken in January 2018. (This is why rule 43 does not specify any treatment for this)

Situation 2: when capital goods being used exclusively for effecting taxable supplies are subsequently used for common purpose

Similarly, for such cases, proviso to rule 43(1)(d) has specified that in such case common credit (Tc) shall be calculated as under –

Input tax on such capital goods                                                          –

Less: 5% for every quarter lapsed from date of invoice                  –

————

TC = ƩA                         –

However, there is no need to take any ITC because ITC would have been taken on fulfillment of conditions of section 16(2) of the Act.

Remaining procedure is exactly the same as discussed in situation-1.

Note: in later part of this article, few situations have been discussed in respect of which law is silent.

Impact of definition of quarter

Definition of “quarter” as given in section 2(92) of the Act is equally important because as per definition, quarter is not a period of three months from one date to another date but is a period of three months being April to June, July to September, October to December and January to March between one date to another date.

If we find out number of quarters from 27.09.2017 to 04.07.2018, then number of quarters as per definition shall be 5 quarters as under –

  • 09.2017 to 30.09.2017
  • 10.2017 to 31.12.2017
  • 01.2018 to 31.03.2018
  • 04.2018 to 30.06.2018
  • 07.2018 to 04.07.2018

Understanding drafting (provisions) of rule 43 with a case study – an easy digest

Assumption: GST law was implemented from 01.04.2010. this assumption has been taken so that reader could imagine the real picture of rule 43.

For better understanding, take example of October 2018. Please consider the following data to analyze drafting of rule 43:

Capital Goods

Date of invoice Period of use relevant purpose IGST charged on invoice (Rs.)
Period

Use during that period

CG1

14.09.2010 From date of invoice For effecting taxable supplies

7,20,000

CG2

03.06.2011 From date of invoice to January 2018 For effecting taxable supplies 4,80,000
thereafter

For effecting exempt supplies

CG3

17.07.2015 From the date of invoice to April 2018 For effecting exempt supplies 6,00,000
thereafter

For common purpose

CG4

19.08.2016 From the date of invoice to February 2017 For effecting taxable supplies 4,20,000
thereafter

For common purpose

CG5

20.09.2016 From date of invoice to September 2018 For effecting exempt supplies 6,60,000
thereafter

For common purpose

CG6

07.12.2016 From date of invoice to September 2018 For effecting taxable supplies 2,00,000
thereafter

For common purpose

CG7

20.08.2017 From date of invoice For common purpose

6,00,000

CG8

05.05.2018 From date of invoice For common purpose

3,24,000

CG9

07.10.2018 From date of invoice For effecting taxable supplies

1,92,000

CG10

16.10.2018 From date of invoice For effecting exempt supplies 1,96,000
CG11 22.10.2018 From date of invoice For common purpose

2,40,000

Common purpose includes for effecting taxable supplies and exempt supplies. Taxable supplies include zero rated supplies

Turnover type

Amount (Rs.)

(For October 2018)

Exempt

4 crores

Total

10 crores

We are preparing return for October 2018.

  1. CG1, CG2

5 years have been lapsed from date of invoice, So, these are not relevant.

  1. Capital goods which are exclusively being used for particular purpose during October 2018

    CG

    Date of invoice Period of use relevant purpose IGST charged on invoice (Rs.) ITC to be taken

    in October 2018

     

    Remarks

    Period

    Use during that period

    CG9

    07.10.2018 From date of invoice For effecting taxable supplies 1,92,000 1,92,000

    See rule 43(1)(b)

    CG10

    16.10.2018 From date of invoice For effecting exempt supplies 1,96,000 Nil

    See rule 43(1)(a)

  2. Capital goods which are being used for common purpose for the first time in October 2018
  3. C/G
    Date of invoice
    Period of use relevant purpose
    IGST charged on invoice (Rs.)
     
    Quarters lapsed from date of invoice to the date when goods used for common purpose
    Calculation of Common credit for October 2018
    Amount of common credit for October 2018
    [A]
     
    ƩA = Tc
    Remarks
    Period
    Use during that period
    CG5
    20-09-16
    From date of invoice to September 2018
    For effecting exempt supplies
    6,60,000
    9 quarters
    (from 20.09.16 to 30.09.18)
    (660000 – 660000 ×5% ×9)
    [see proviso to rule 43(1)(c)]
    363000
    ITC of Rs. 363000 shall be credited to electronic credit ledger in October 2018
    [see proviso to rule 43(1)(c)]
    there-after
    For common purpose
    CG6
    07-12-16
    From date of invoice to September 2018
    For effecting taxable supplies
    200000
    8 quarters
    (2,00,000 – 2,00,000 × 5% × 8)
    [see proviso to rule 43(1)(d)]
    120000
    ITC of Rs. 1,20,000 shall not be credited to electronic credit ledger in October 2018 because Rs. 200000 would have been credited in December 2016 as per rule 43(1)(b)
    thereafter
    For common purpose
    CG11
    22-10-18
    From date of invoice
    For common purpose
    2,40,000
    see rule 43(1)(c)
    240000
    ITC of Rs. 240000 shall be credited to electronic credit ledger
    Common credit in respect of capital goods during useful life of 5 years [Tc] = ƩA
    723000
    see rule 43(1)(d) and it’s proviso
    One-month proportionate common credit
    [Tm] =
    Tc ÷ 60
    12050
    See rule 43(1)(e)
  4. Other capital goods which are being used for common purpose in October 2018
           CG4: Tc in respect of CG4 would have been calculated in March 2017 as under
C/G
Date of invoice
Period of use relevant purpose
IGST charged on invoice (Rs.)
 
Quarters lapsed from date of invoice to the date when goods used for common purpose
Calculation of Common credit for March 2018
Amount of common credit for March 2017
[A]
 
ƩA = Tc
Remarks for October 2018
Period
Use during that period
CG4
19-08-2016
From the date of invoice to February 2017
For effecting taxable supplies
4,20,000
3 quarters
(from 19.08.2016 to 28.02.2017)
(4,20,000 – 4,20,000×5%×3)
[See proviso to rule 43(1)(d)]
3,57,000
ITC of Rs. 3,57,000 not to be credited in credit ledger in October 2018 because 4,20,000 would have been taken (credited) in August 2016 as per rule 43(1)(b)
thereafter

For common purpose

Common credit in respect of capital goods CG4 during useful life of 5 years [Tc] = ƩA

3,57,000

see rule 43(1)(d) and it’s proviso

One-month proportionate common credit

[Tm] =

Tc ÷ 60

5,950

See rule 43(1)(e)

CG7: Tc in respect of CG7 would have been calculated in August 2017 as under

C/G
Date of invoice
Period of use relevant purpose
IGST charged on invoice (Rs.)
 
Quarters lapsed from date of invoice to the date when goods used for common purpose
Calculation of Common credit for August 2017
Amount of common credit for August 2017
[A]
 
ƩA = Tc
Remarks for October 2018
Period

Use during that period

CG7

20-08-2017 From the date of invoice For common purpose 6,00,000 6,00,000

ITC of Rs. 6,00,000 shall not to be credited in credit ledger in October 2018 because it would have been taken (credited) in August 2017 as per rule 43(1)(c)

Common credit in respect of capital goods CG7 during useful life of 5 years [Tc] = ƩA

6,00,000

see rule 43(1)(d) and it’s proviso

One-month proportionate common credit

[Tm] =

Tc ÷ 60

10,000

See rule 43(1)(e)

CG3 & CG8: Tc in respect of CG3 & CG8would have been calculated in May 2018 as under

C/G
Date of invoice
Period of use relevant purpose
IGST charged on invoice (Rs.)
 
Quarters lapsed from date of invoice to the date when goods used for common purpose
Calculation of Common credit for May 2018
Amount of common credit for May 2018
[A]
 
ƩA = Tc
Remarks for October 2018
Period
Use during that period

CG3

17-07-15 From the date of invoice to April 2018 For effecting exempt supplies 6,00,000 12 quarters

(from 17.07.15 to 30.04.18)

(600000 – 600000 ×5% ×12)

[see proviso to Rule 43(1)(c)]

240000 ITC of Rs. 240000 shall not be credited in electronic credit ledger in October 2018 because it would have been taken (credited) in May 2018 as per proviso to rule 43(1)(c)
thereafter

For common purpose

CG8

05-05-18 From the date of invoice For common purpose 3,24,000 324000

ITC of Rs. 3,24,000 shall not be credited in electronic credit ledger in October 2018 because it would have been credited in May 2018 as per rule 43(1)(c)

Common credit in respect of capital goods CG3 & CG8 during useful life of 5 years

[Tc] = ƩA

564000

see rule 43(1)(d) and it’s proviso

One-month proportionate common credit

[Tm] =

Tc ÷ 60

9,400 See rule 43(1)(e)

Amount of ITC on all capital goods whose useful life remains during October 2018 [Tr] shall be calculated as under [see rule 43(1)(f)]–

Tr = Ʃ Tm

= 12,050+5,950+10,000+9,400

= 37,400

Amount of credit attributable towards exempted supplies for October 2018 [Te] shall be calculated as under –

Te = (E÷F) × Tr

= (4÷10) × 37,400

              = 14,960/-

Where –

E = Exempt turnover for the tax period i.e. October 2018 in our example

F = Total turnover for the tax period i.e. October 2018 in our example

Conclusion of determination and apportionment of ITC for October 2018

(As per rule 43)

Amount to be credited in electronic credit ledger (i.e. ITC to be taken) in respect of –

CG9     :     1,92,000

CG5     :     3,63,000

CG11   :     2,40,000

7,95,000

Te to be added to output tax liability as per rules (but to be shown as reversal in GSTR-3B)

14,960

Situations not specifically covered by law

  1. When capital goods being used for common purpose are subsequently used exclusively for effecting exempt supplies

Suppose a capital goods was received on 22.09.2017 along with invoice of even date. IGST charged on invoice was Rs. 1,20,000. Since the date of it’s receipt, it was being used for common purposes but from 01.10.2018, it is being used exclusively for effecting exempt supplies. Undoubtedly, ITC has to be reversed in month of October 2018 due to rule 43(1)(a).

Here, it is important to mention that rule 43(1)(c) specifies that useful life of commonly used goods shall be taken to be 5 years.

But in the absence of any specific provisions for treatment of ITC, here following questions arises –

  1. Whether full ITC of Rs. 1,20,000 should be reversed?
  2. Whether ITC to be reversed shall be reduced by 5% per quarter or part of the quarter?
  3. Whether ITC to be reversed shall be reduced by 1/60th per month or part of the month?

Note: calculation on the basis of month may differ from the calculation on the basis of quarter.

This becomes relevant to mention other related provisions like rule 32 where 5% per quarter has been used. similarly, again in rule 40, 5% per quarter has been used. But in rule 44, 1/60 per month has been used.

This is matter of differences, so author reserves his views and leaves on learned members to decide on their own.

  1. When capital goods being used for common purposes are subsequently used exclusively for effecting taxable supplies

Here actually, there is no need for specific provision because ITC would have already been credited in electronic credit ledger.

  1. When capital goods being used exclusively for effecting taxable supplies are subsequently used exclusively for effecting exempt supplies

Undoubtedly, as per section 17(2) r.w. rule 43(1)(a), ITC shall be reversed.

Again, Rule 43 is silent on whether useful life of such capital goods is also to be taken 5 years. But it becomes relevant here to mention rule 44 where law states that life of capital goods shall be taken to be 5 years.

So here also, one has to decide whether –

  1. Whether full ITC taken earlier shall be reversed?
  2. Whether ITC to be reversed shall be reduced by 5% per quarter or part of the quarter?
  3. Whether ITC to be reversed shall be reduced by 1/60th per month or part of the month?

Author’s view is that one must choose between b & c.

  1. When capital goods being used exclusively for effecting exempt supplies are subsequently used exclusively for effecting taxable supplies

Undoubtedly, as per rule 43(1)(b), ITC shall be available.

Again, Rule 43 is silent on whether useful life of such capital goods is also to be taken 5 years. But it becomes relevant here to mention rule 44 where law states that life of capital goods shall be taken to be 5 years.

So here also, one has to decide whether –

  1. Whether full ITC to be taken?
  2. Whether ITC to be taken shall be reduced by 5% per quarter or part of the quarter?
  3. Whether ITC to be taken shall be reduced by 1/60th per month or part of the month?

Author’s view is that one must choose between b & c.

Other issues

  1. Section 17(3) states that exempt supplies shall include sale of land and sale of complete buildings. So now question here arises whether normal ITC shall get hit by rule 43?

Here one has to see that if any capital goods are being used for effecting exempt supply then only ITC shall not be available. So, one has to see if any particular capital goods were used for sale of land/said building, then only ITC shall be hit by rule 43 which author thinks is unlikely.

Likewise, one has to see for other exempt supplies like sale of duty scrips etc.

Bird’s eye view of Rule 43

Step-1: Find out all those capital goods which are not older than 5 years from the date of invoice. Because, as explained above, self-assessment of ITC on capital goods older than 5 years would have been dealt with earlier.

Step-2: Classification of capital goods as identified in step-1 and respective treatment

For any queries and suggestions, author may be reached at shashankguptafca@gmail.com

Important Note: Author has full copyright on contents of this article.

Author Bio

Qualification: CA in Practice
Company: Parthsarthi's Tax Chambers, Agra
Location: Agra, Uttar Pradesh, IN
Member Since: 02 Jun 2018 | Total Posts: 2

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One Comment

  1. Bhanu says:

    If already the Capital good had been used for 12 months (Exclusively for Exempted purposes) then why are you again taking 60 months when it is used for common purposes. Eventhough the amount will match according to you, taking the remaining life will be accurate.

    Is the above is correct ???

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