The Goods and Services Tax (GST) system introduced in several countries, including India, has changed the world of taxation. One of the key features of the GST framework is the Input Tax Credit (ITC), which allows businesses to offset taxes paid on purchases against their sales tax liability. In the case of capital goods, the rules and regulations for claiming input tax credit are special and of great importance for businesses.
GST-compliant capital goods are subject to ITC rules
Latest updates Budget updates 2022
1 ITC cannot be claimed if available as restricted under clause 38 of GSTR-2B.
2. The deadline for collecting ITC on invoices or debits for the financial year has been changed compared to the two earlier dates. First, November 30 of the following year, or second, the date of sending the annual reports.
4. Section 41 is also amended to remove references to provisional ITC claims and to provide for self-assessed ITC claims with conditions.
5. Sections 42, 43, and 43A dealing with the initial ITC claim procedure, adjustment, and cancellation are omitted.
Rule 36(4) of CGST is amended to remove five separate ITCs in addition to the ITC in GSTR-2B. From 01.01.2022, companies can avail ITC only if the supplier declares it in GSTR-1/IFF and it is reflected in their GSTR-2B.From January 1, 2022, ITC claims will be allowed only if reflected in GSTR-2B. Hence, taxpayers can no longer claim 5% provisional ITC under Rule 36(4) of CGST and ensure that every ITC figure claimed is reflected in GSTR-2B.
What are capital goods?
Fixed assets are assets such as buildings, machinery, equipment, vehicles, and tools that an organization uses to produce goods or services. For example, a blast furnace used in the iron and steel industry is the capital of a steelmaker.
Difference between capital goods and other inputs Let’s give an example. You are making a cake in your oven. Add ingredients like eggs, water, flour, and butter. These are your inputs. The cake is your final product. An oven is a basic asset that helps in making a cake. Inputs are consumed in the production of the final product and are treated as business expenses such as production costs.
Capital goods are not consumed in the production of the final product. They are not consumed during one year of production. Therefore, they cannot be fully deducted as business expenses in the year of purchase. Instead, they are depreciated over their useful economic lives. A company records a portion of the cost each year as depreciation and amortization using accounting techniques.
Which capital goods are subject to GST?
Capital goods in the context of GST are assets that are not intended for resale but are used to produce goods or services or earn income. These may include machinery, equipment, computers, furniture, etc. The distinction between capital goods and ordinary business assets or consumer goods is important as it affects the eligibility and application process for input tax credits. What is capital goods credit? When you buy something, you have to pay GST on it. You can later claim input tax credit on the GST paid on your purchases. Similarly, if you buy machinery for your factory, you will pay the applicable GST price. This GST paid can be claimed as a refund in the same way as contributions. However, if you claim depreciation on the GST paid on the capital purchase, you will not be able to claim an input tax credit.
Right to tax reduction on production inputs of capital goods
A company has to fulfill several conditions to get a tax credit on capital goods under GST:
GST Registration
The business must be registered under the GST regime. Unregistered entities are not eligible for ITC.
Commercial use
The investment property must be used for commercial purposes, especially for the production of goods or services or for the generation of income.
Possession of valid documents
The company must have valid tax invoices or other prescribed documents to prove the taxes paid on the purchase of capital goods.
Applying for tax reduction on production inputs of capital goods
The application process for capital goods manufacturing input tax relief can be summarized as follows:
Full credit in the month of use
Once the capital goods are accepted and used for business purposes, the company can claim the full tax credit in the same month. Refunds are required based on a tax invoice or other documents proving eligibility.
Mixed Use Part Credit
In cases where capital goods are used for business and other purposes, only the part used for business is eligible for input tax credit. The entrepreneur must define the part of the credit suitable for use in business and request it accordingly.
Abolition of tax reduction on production inputs
It is important to note that capital goods input tax credit can be canceled in certain situations. Conversion can occur if:
Investment goods are delivered to another party.
Capital goods are used for non-business purposes.
Capital goods are used to produce exceptional supplies.
There has been a change in the structure of the company, for example, there is a transition from a standard assembly system to a standard taxpayer system.
Time period to avail of input VAT credit
As a general rule, the capital goods production input tax credit must be used in the same accounting period. However, there are some exceptions. For example, if the capital goods are part of a long-term project or investment, the credit can be claimed over several accounting periods.
Conclusion
Input tax credit on capital goods is an important part of the GST framework. It offers businesses the opportunity to reduce their tax liability by claiming back taxes paid on their manufactured goods. However, compliance with GST rules, proper documentation, and fulfillment of certain conditions are crucial for the successful utilization of capital goods input tax credit. Keeping abreast of the latest GST rules and consulting with tax professionals will help businesses navigate this complex landscape and make the most of the GST system.
FAQ of Input Tax Credit on Capital Goods under GST
1. Who is eligible to claim Input Tax Credit (ITC) on capital goods under GST?
GST-registered companies can claim ITC on capital goods if they are used for business purposes.
2. How can I apply for capital goods production input tax credit?
You can claim full ITC in the same month the capital goods are received and used for business. Make sure you have valid tax invoices or valid documents for capital goods.
3. Can I claim ITC on capital goods used partly for business and partly for non-business purposes?
Yes, you can claim ITC on the side of fixed assets used for business purposes. However, you must accurately determine and claim the eligible portion.
4. What happens if I deliver manufactured goods to another party or use them for a purpose other than business?
If the capital goods on which ITC has been claimed are supplied to another party or used for non-business purposes, it may be necessary to cancel the ITC claimed with applicable interest.
5. What are the most important documents to claim capital goods ITC?
To prove the taxes paid on the purchase of capital goods, you need valid tax invoices or prescribed documents.
This blog is written by Aditi Dixit.
