Input Tax Credit means claiming the credit of GST Paid on Purchase of goods or Receipt of services which are used in the course business.
Sec (19) of CGST Act states “capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
Goods will be regarded as capital goods if the following conditions are satisfied:
(a) The value of such goods is capitalised in the books of account of the person claiming input tax credit;
(b) Such goods are used or intended to be used in the course or furtherance of business.
For example, a blast furnace used in iron and steel industry is a capital asset for the steel manufacturer.
Rule 8 of the ITC rules deals with ITC in case of capital goods.
When you purchase anything, you are required to pay GST on it. Later, you can claim input tax credit on the GST paid on your purchases. Similarly, when you are purchasing any machinery for your factory, you will pay the applicable GST. This GST paid can be claimed as credit in the same way as inputs. However, if you claim depreciation on the GST paid while purchasing the capital asset, you cannot claim input tax credit.
Common Credit: Businesses often use the same assets and inputs for both business & personal use.
One can claim the input credit of GST paid on purchase of Capital Good only to the extent it pertains to business.
ITC is only available for business purposes. Many traders use the same inputs for both business & personal reasons. A taxpayer cannot claim any tax benefit of personal expenses.
Again, goods exempted under GST already enjoying tax benefit. ITC cannot be claimed for inputs used in such exempted goods as it will lead to negative taxation. So, ITC on inputs for exempted goods will also be removed.
No ITC is available for personal purchases or for capital goods used in exempted sales. This will be indicated in FORM GSTR-2 and shall not be credited to the electronic credit ledger.
If a capital asset was earlier used exclusively used for:
Personal purpose; OR
Selling exempted goods.
And now it will is used commonly for:
Business and personal purpose; OR
Affecting taxable and exempt supplies
Input tax to be credited to electronic credit ledger = Input Tax – 5% of Input tax for every quarter or part thereof from date of invoice.
Use of credit for partly personal/ exempted and partly normal sales:
The ITC paid for the capital goods will be credited to electronic credit ledger.
Useful life of such capital asset will be taken as 5 years from the date of purchase.
Now the total amount of input tax credited to electronic credit ledger for the whole useful life will be distributed over the useful life.
If you pay GST on a monthly basis then you will use the following formula to calculate available ITC.
The amount of common credit attributable towards exempted supplies is calculated as under
ITC attributable to exempt supplies
= (Value of exempted supplies/ Total Turnover)* Credit for a tax period.
ABC Ltd has purchased 3 machineries in April 2017 to be used for various purposes as per the table given below. Total aggregate supplies = Rs.18 cr, value of exempt supplies = Rs.3 cr. Calculate ITC for the month of April 2017.
Note: Tax credit for a tax period for Machine – 3 = 72000/60 = 1200 .
ITC attributable to exempted supplies = 3/18 * 1200 = 200.
The above amount of Rs.200/- will be added to the output tax liability for every tax period.
Reversal of ITC in case of capital goods
In case capital goods were initially used for non-business purposes and for effecting exempted supplies, but subsequently used for business and non-business purpose and effecting taxable and exempt supplies, then the amount of ITC that will be credited to the electronic credit ledger shall be arrived at by reducing the ITC @ 5% for every quarter or part thereof.
In case of capital goods which were earlier used, or intended to be exclusively used for effecting taxable supplies and business purpose, but subsequently used for business and non-business purpose and effecting taxable and exempt supplies, then the amount of ITC that will be credited to the electronic credit ledger shall be arrived at by reducing the ITC @ 5% for every quarter or part thereof.
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