What is ITC Rules for Capital Goods under GST?

Narendra Kumar

31 Mar, 2021

Input tax has been proved to be the most significant feature in the era of GST. It has changed the style of taxation charging on goods and services. Today, in this article we will tell you about the rules impended on ITC Rules. for capital goods under the GST system.

We do know you know the definition but just recall it once before heading the articled-

What is Input Tax Credit?

ITC means the Input Tax Credit^[1].  It is the backbone of the GST regime as the whole GST is lying on it.  An input Tax credit means at the time of paying tax on the output you can reduce the tax which you have already paid on inputs.

For example-   You paid input tax on raw material for Rs 300. After that when the product is ready for sale you paid an output tax for Rs 500. Now, at this time you can claim an Input tax credit of Rs 300 and will only oblige to pay Rs 150 in taxes.

Input Tax Credit = Output Tax on the final product – Input Tax on the raw material.

What is the Input Tax Credit in GST?

Input tax credit Mechanism is only available to you when you covered under the GST act. That means, if you are a manufacturer, supplier, agent, e-commerce operator, aggregator or any of the person that covers under GST and registered GST then you are eligible to claim ITC paid by you on your purchase.

What are an ITC Rules for Capital Good?

Capital goods are assets such as building, equipment, machinery, vehicles, and tools that an organization uses to produce goods or service. Taking an example of a Blast furnace that is used in the iron and steel industry is a kind of capital asset for the steel manufacturer.

How to Claim an Input Tax Credit under GST?

To claim an Input Tax Credit under the GST the following are the factors you need to cover-

• A Tax invoice or Debit note issued by the registered dealer. However, if goods are received on lots or installments then the credit will be avail against the tax invoice upon receipt of last lot or installment.
• Goods or service should be received.
• Any amount that charged as a tax should be deposited or paid to the government by the supplier in cash or via claiming input credit.
• The supplier has filed GST Returns.

It is also possible to carry forward or claim a refund in Input tax credit in case you have unclaimed input credit which is due because of the high tax paid on purchase or sale.

Now heading for the main topic i.e. what is Input Tax Credit rule for Capital Goods under GST?

Rule 8 of the Input Tax Credit deals with the ITC in case of capital goods in GST-

1. The amount of the Input tax credit is not allowed to be credited to the electronic credit ledger under the following circumstances if –
   • Capital goods are exclusively used for the purpose of personal use or non- business purpose
   • Capital goods used for exempt supplies
2. The amount of ITC which is used or intend to use for the taxable supplies including zero-rated supplies shall be credited to the electronic ledger.
3. ITC in case of Capital goods are commonly used for exempt and taxable supplies or business and non- business that can be claimed as under-
   • The total amount should be only credited in electronic credit ledger
   • The life of the capital god shall be taken only like 5 years
   • The total amount of Input tax credited to the Electronic ledger is known as “Common Ledger”. The formula is-

Credit for tax period= ITC credited to electronic Credit Ledger / 5* 12 months

4. Tax period shall be every month
5. The amount of common credit towards the exempted supplies shall be calculated according to the formula.
6. The amount of the Input tax credit towards the exempted supplies along with the interest shall during the tax period of the life of the concerned equipment be added to the output tax liability of the person making such claim of the credit.
7. Balance amount of the credit after the deduction of the ITC shall be forward as ITC
8. In future, where any of the capital good was initially used as non- business use but later use as business use then ITC shall be credited to the electronic ledger as follows-

ITC=Input tax – 5% of the input tax for every quarter or part there of

Conclusion

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