Easy Guide to Capital Goods Under GST with ITC Eligibility

The tax on the supply of goods or services or both comes under GST and here we will discuss the main topic of capital goods under GST. The registered person who is involved in the export of goods or services or taxable supply or both can utilize qualified ITC on goods or services or both used in the development of the business. ITC can be utilized on inputs, input services, and capital goods.

Here we are discussing all the aspects and ITC-related norms of capital goods under GST.

The Concept of Capital Goods Under GST Law:

The word capital goods has been clarified in GST law. Capital goods refer to the goods, whose value is capitalized in the books of account of the person who is claiming the Input Tax Credit and which are purposefully used in the development of the business.

To assess a good as capital under GST, the following are the points which must be satisfied:

• It should be good: to enclose portable property except for money, and shares [land and building are not goods], Good is defined;
• When the advantage of Goods capitalized in the books of accounts from goods can be acquired for more than a year, and
• Used in the course of business: the capital is used regarding the business.

Under former Cenvat Credit Rules, capital goods were defined to enclose particular goods which were enclosed in the particular heading of Central Excise Tariff, like, from chapter 84- plant and machinery, from chapter 85-electrical appliances. Likewise, in VAT laws, including in Karnataka VAT, Capital goods signifies a plant, including cold storage and likewise plant, equipment, tools, moulds, jigs, good vehicles and machinery.

Under GST, we can say that the aim of the capital goods has been enlarged to enclose somewhat goods which are capitalized in the books of accounts.

Before the GST reign, the credit of capital goods was essential to be used in two parts i.e 50% in the first half of the year and while the other 50% in another half. And after GST reign, the credit of capital goods can be utilized at one time when it is obtained under GST.

Points While Utilizing the Credit of Capital Goods

• The credit can be utilized on the capital goods in GST, given the depreciation of tax component is not claimed. Likewise, provision was present in Cenvat credit rules.
• If capital goods are utilized only for the supply of taxable goods or services, the ITC of capital goods cannot be utilized fully.
• If the capital goods are utilized only for manufacturing or selling or providing exempt goods or services or used for a personal cause, the ITC of capital goods cannot be utilized fully.
• If the capital goods are used partially for exempted supplies and partially for taxable supplies, then the credit of the capital goods which is related to the certain month must be changed which is attributable to exempt supplies on a proportionate turnover basis.
• For this purpose, the useful life of the capital good is deemed to be 5 years. Therefore the credit attributable to a certain month will be the total ITC utilized of the certain goods divided by 60 months (5 years) and the credit attributable to exempt supplies should be reversed proportionately to the exempt turnover of the month.
  • Credit attributable to a particular month {Tm}= Total ITC availed on the capital good / 5 Years
  • Credit attributable to exempt supplies {Te}= Te * Exempt turnover in the month / Aggregate turnover of the month

Therefore, the ‘Te’ amount should be reversed along with interest.

• ITC cannot be utilized if the capital goods will be lost, destroyed, stolen, written off or disposed of by the way of gift or free samples or used for personal consumption.
• ITC of the capital goods cannot be utilized if it is held on the day before taking registration under GST.

Credit Eligibility Various Capital Goods Under GST:

• Works contract services and construction services: the goods/services which are used for the construction of buildings for business purposes including works contract services are limited if such buildings are capitalized in the books of accounts.
• Plant and machinery: In the case of eligibility for credit, the pant and machinery are not included in construction and works contract services. It is defined as equipment, apparatus and machinery fixed to earth by structural or foundation and includes such structural supports and foundation. However, it does not include buildings, land or any other civil structures; telecommunication towers; and pipelines placed outside the factory property. The credit of plant and machinery would be available if:
  • There is no claim of depreciating tax component in the IT act of such plant and machine.
  • To effect taxable supplies in the development of business, such plants are used.
• Motor vehicles: under GST, the credit for cars, bikes, etc is restricted. The seating capacity of more than 13 persons (including the driver) is utilized and is approved by the ITC of motor vehicles for the transportation of persons.
• If the seating capacity is 13 persons or less, then the credit would be available only when such vehicles are used for:
  • Supply of motor vehicle: The credit can be utilized by the car dealer if he buys/sells the motor vehicles in the development of business;
  • Supply of passenger transportation service: The credit can be utilized by the person who is involved in supplying transportation services to passengers [auto rickshaws, cabs] which he uses to provide such services;
  • Imparting training services on driving such motor vehicles: The credit can be utilized if a car driving trainer or instructor trains people; or
  • Transportation of goods: Vehicles (lorries) which are used to only transport goods from the factory to factory outlets, can utilize the credit. In this case, it is not important that such vehicles should be used for supplying goods and transportation services.
• Vessels and Aircraft: The credit of vessels and Aircraft will be utilized only if they are used under:
  • Vessels and aircraft supply;
  • Transportation of passengers: For example- Air travel services;
  • Giving training on navigating such vessels or flying such Aircraft; or
  • Transportation of goods.

Recommended: List of Goods and Services Not Eligible for ITC

ITC Eligibility of Basic Capital Goods:

Capital Goods	Eligible (Yes/ No)
Air conditioner, electrical fittings, bulbs, CCTV etc.	Yes
UPS, generator, transformer	Yes
Furniture	Yes
Computer and related machines like printers, scanners, etc.	Yes
Plant and machinery	Yes
Software	Yes
Goods for the construction of buildings	No

Miscellaneous:

• The credit of capital goods cannot be utilized by a composition dealer and a non-resident taxable person. Credit on tax paid on the import of such capital goods can be utilized by the non-resident taxable person.
• While at times the composition dealers transferring to a regular registered dealer or exempted goods turn taxable, concerned with the capital goods, as full credit cannot be taken
• Till the date of conversion or change in rate, the ITC should be reduced at 5% per quarter (or part thereof) from the invoice date.
• The credit should be reversed, for the person who is registered under GST under the regular scheme, gets converted to the composition scheme, or the goods or services for which the capital goods are being used, become exempt, ITC of the capital goods is not eligible.
• Credit attributable to the left part of the useful life should be reversed, and full ITC should not be reversed.

Conclusion

To the level used for making taxable supplies of goods/services, the credit must be utilized on the goods which are capitalized in books of account. The input tax credit computer/ UPS/ office furniture tables are not capitalized in books and may still be availed by treating them as inputs, provided it is used in the development of the business of making taxable supplies.