INPUT TAX CREDIT (ITC) IN RESPECT OF CAPITAL GOODS UNDER GST LAW
1. As per section 16 if CGST Act, every registered person will be entitled to take input tax credit (ITC) in respect of input tax charged to him on supply of goods or services to him, if it is used or intended to be used in the course of or in furtherance of his business. Two conditions, by way of rules, as may be prescribed and manner provided in section 49 are attached to enjoyment of ITC. As per provisions of section 49, inter alia, the manner of utilization of ITC is provided. The person who is entitled to ITC must be registered person. One who has not taken registration in time and afterwards either registration is enforced or voluntarily taken on the ground that the Turnover exceeded threshold limit, will not be entitled to ITC for the unregistered period though his purchases were on payment of GST on procurement side. On payment side during this unregistered period, full liability without ITC, has to be discharged. The section does not make any distinction between capital goods and other goods for allowing credit of ITC. Hence, ITC in respect of capital goods, is available to be taken, since ITC credit for capital goods is in parity with other goods, and is available in the month/quarter/year of purchase.
2. The Section 2(19) provides for definition of capital goods. It provides, capital goods are those goods, values where of have been capitalized and are used or intended to be used in the course or in furtherance of business. Hence, capital goods which are not capitalized, that is to say, not debited to respective asset account, ITC in respect thereof, is not available to be taken credit.
3. However, Section 2(59) provides that “input” means any goods other than capital goods used or intended to be used in the course or in furtherance of business. It has implication that wherever word input is used, and not input tax, the same shall mean input other than capital goods.
4. As per section 16(3), ITC is not available in respect of tax element of capital goods upon which depreciation is claimed under Income Tax Act 1961 as part of cost of asset. Hence, it is advisable not to claim the tax component of inward supply as part of cost of capital asset while claiming depreciation. And additional words used are “plant and machinery” even if debited to profit and loss account , and not capitalized , will be be available for claiming ITC, unless tax component of plant and machinery, is not added in the value of plant and machinery for claiming depreciation. There appears to be absurdity , if capitalized it will be , covered by earlier terms “capital goods” and if not capitalized no depreciation can not ordinarily claimed.
5. As provided in section 18(1) (c) and (d) r/w Rule 40 if dealer opts for Composition Scheme as per section 10 and thereafter , for any reasons , ceases to be entitled to Composition Scheme, he is entitled to claim ITC on capital goods, inter alia other goods, semi-finished or finished, held on the date on which he once again liable to GST u/s 9 (regular levy), subject reduction under Rule 40 of 5% per centage per quarter from the date of invoice for purchase of such capital goods, i.e. 20% per annum assuming life of asset as five years. The period of five years artificial and is not realistic. Hence, coming to taxability u/s 9 is after five years of date of invoice of capital assets, no ITC shall be available even if held. [S 18(1)(c)].The same principle applicable when goods supplied by taxable person which is exempt becomes taxable liable to GSTS [S.18(1)(d)]. Similarly, if the taxable person opts for Composition Scheme u/s 10 or good become exempt subsequently, then ITC , earlier claimed, will be paid back after reduction of 5% per quarter from the date of purchase of capital goods, till the date of opting for Composition Scheme or date of of exemption[S 18(4) Rule 44(1) (b)].Similarly, when the capital goods or plant and machinery which are supplied,(i.e. sold) , the registered person shall pay the amount of ITC availed thereon as reduced by 5% per quarter from the date of the inward supply invoice to the date of supply, in respect of such capital goods or plant and machinery[S18(6), Rule 40(2)].
6. In respect of capital goods sent for job work, full ITC is available notwithstanding that the goods have not been sent to job worker from the place of the taxable person[S19(4) and (5)].But the supply of capital goods to job worker shall be deemed to be supply of goods if the said capital goods have not been returned back to the taxable person within three years from the date of supply by taxable person [S 19(6)].Consequently, ITC claimed will have to be reversed and paid in cash, u/s 18(6), after reducing the amount calculated at 5% per quarter from the date of invoice of capital goods till the date of expiry of three years.
7. If the registration of the taxable person is cancelled then whatever ITC utilized in respect of such capital assets shall be debited to electronic cash/credit register, after reducing 5 % percentage per quarter from the date of the invoice of capital goods till the date of cancellation of Registration [S 29 r/w Rule 44(1)(b)].
8. If CENVAT credit is carried forward in respect of capital goods in a return by a taxable person while filing return under erstwhile excise law, the taxable person other than taxable person under Composition Scheme, can take ITC of that amount .Conditions for availing ITC are :
(a) The said credit is admissible as input tax credit under the provisions of the CGST Act;
(b) The registered person has furnished all the returns required under the existing law for the period of six months immediately preceding the appointed date.
(c) Input tax credit does not relate to goods manufactured and cleared under exemption notifications as are notified by the Government.
(d) Input tax credit carried forward will not be allowed if such credit relates to goods manufactured and cleared under exemption notifications as notified by the Government.
(e) Trans I (Rule 117) is filed within 90 days from 1.7.2017 this date has been extended from time to time by Government and Courts.
9. Thus, though ITC is available for capital goods, it is with certain conditions and restrictions as stated above.
By Vinay Sonpal LL.M. Advocate