When GST was introduced, one of its biggest selling points was the promise of seamless credit – no more cascading taxes, no more blocked input credits. For many businesses, this was a breath of fresh air. But somewhere along the way, the law lost touch with practical realities. Nowhere is this more evident than in the rigid limitation imposed on Input Tax Credit (ITC) for capital goods.
As someone who regularly advises businesses, I’ve seen how this restriction turns what should be a simple credit mechanism into a compliance trap.
The Problem: Time Is the Barrier
Under Section 16(4) of the CGST Act, ITC must be claimed by the earlier of:
- 30th November following the end of the financial year (updated from 30th September), or
- The date of filing the annual return (GSTR-9).
On paper, this might seem generous. But in practice, especially for capital goods purchased toward the end of the financial year, it creates a perverse disadvantage.
In a simple way: if a company buys machinery in March and fails to claim ITC before November, the credit is gone. Not deferred — gone.
Compare that with a business that buys the same machinery in April. They get over 19 months to claim. Same transaction, same tax, different treatment. Where’s the fairness in that?
The Unseen Cost of Compliance-Driven Decisions
Businesses don’t always time their capital purchases around tax deadlines. Sometimes, deals close late. Machinery arrives late. Commissioning takes time. Often, the invoice shows up in the middle of a financial year-end scramble.
But as per the GST act, If the credit isn’t claimed in time, it’s lost.. Capital budgeting decisions get distorted, not because of business needs, but because of arbitrary tax cut-offs.
I’ve had clients in manufacturing and logistics tell me they’ve deliberately delayed purchases or rushed installation just to stay within the credit window. This isn’t tax planning — it’s tax-induced inefficiency.
Capital Goods Deserve a Different mechanism
Let’s be clear — capital goods are not consumables. They are long-term assets. Their benefits extend across several years. Yet GST treats them like stationery bought in bulk — same rules, same deadline.
What’s more frustrating is that businesses can depreciate these assets over years under income tax law, but can’t carry forward the input credit even for a few months under GST.
Why can’t we treat ITC on capital goods more realistically? At the very least, let it be claimed over a longer window — even two years would be fair. Better yet, create a separate ITC category for capital assets with rollover provisions, like in VAT regimes elsewhere.
Judicial Responses: Mixed but Revealing
Various High Courts have examined this issue in different ways. Some like the Kerala High Court (June 2024) have taken a liberal view, allowing retrospective application of procedural extensions. Others like the Madras High Court (in 2020) have taken a stricter stance, calling ITC a concession rather than a right.
This legal uncertainty only adds to the confusion on the ground. Businesses are left unsure whether to rely on the law or fight it out in court.
What Should Be Done
Here’s what I believe needs to change:
- Capital goods should be carved out from Section 16(4) and given a separate, extended timeline.
- Allow carry-forward of unclaimed capital ITC into the next year under audit conditions.
- Introduce a grace period for capital purchases made in the final quarter.
- And most importantly, the GST Council needs to recognise this as a systemic flaw, not just a compliance issue.
Closing Thoughts
The goal of GST was simplicity, transparency, and neutrality. But for capital goods, the time-bound ITC system does the opposite — it penalizes legitimate investments, adds compliance pressure, and often punishes the most capital-intensive sectors.
This is more than just a technical glitch — it’s a business deterrent.
If India wants to remain a competitive destination for manufacturing and infrastructure investment, it must stop penalizing businesses for procedural oversights and start trusting them to use their credit fairly. The law should support growth, not stand in its way.
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