There are different provisions under the GST regime to calculate input tax credit (ITC) on capital goods under GST, availability and non-availability of input tax credit and ITC reversal calculation as well.
In addition to this, capital goods use special provisions as well for both taxable and exempted supplies.
What are Capital Goods Under GST Act?
Under section 2 (19) of the GST Act, “Capital goods” is mentioned as the goods, worth of which is capitalized in the books of account of the person requesting for the input tax credit and the goods which are used and meant to be used in the course or furtherance of business.
What is Input Tax Credit (ITC) on Capital Goods?
If the capital goods are used only for business purpose, the person will be eligible for claiming input tax credit available on capital goods under GST. There is the only condition of mentioning transaction in the GSTR filing.
In other cases, ITC on capital goods is not available, if it is used especially for effecting exempt supplies and for personal use only.
Formula to Calculate Input Tax Credit
If a capital good is used for both business and personal use then one can evaluate the input tax credit as per the following formula.
If GST paid per month then Input Tax Credit calculated via following formulas
GST Paid on Monthly Basis – Input Tax Credit on Capital Goods – Mixed Use
Input Tax Credit = Input Tax Credited to Electronic Ledger / 60
The number 60 is obtained from multiplying months of 5 years. Hence, 5 * 12 = 60
2. In case GST payment done on Quarterly basis then Input Tax Credit is concluded via the formula given below
GST Paid on Quarterly Basis – ITC on Capital Goods – Mixed Use
Input Tax Credit = Input Tax Charged to Electronic Ledger / 20
The number 20 is evaluated by multiplying 5 years with the number of quarters in a year. thus, 5 * 4 = 20.
Personal Use Transformed into Mixed Use
The second formula is to be used when capital goods which were used once for personal purpose and later on used for both, personal and business purpose.
Input tax to be ascribed to electronic credit ledger = Input Tax – 5% of Input tax for every quarter or part thereof from the date of invoice.
Common Input Tax Credit Payable Towards Exempted Supplies
Common Credit Calculation Formula for Exempted Supplies
Step 1: Credit towards Exempted Supplies = (Cost of exempted supplies / total turnover) * Credit for tax term.
Step 2: Appropriate Input Tax Credit = Total of input tax credit – credit towards exempted supplies.
Sale of Capital Goods Under GST
The CGST Act u/s 18 has provisions for the sale of capital goods along with conditions and limitation if the input tax credit has been taken on the considered supply of goods given below is payable.
The input tax credit taken on the above-mentioned capital goods or plant and machinery, the similar amount is reduced by such percentage according to the provision of Rule 44(6); or the tax on the transaction value of considered capital goods or plant and machinery levied as per section 15, whichever is higher.
The input tax credit (ITC) for capital goods held in stock, the remaining useful life of capital goods in months considered five years calculated on prorata basis as per rule 44 (6).
In addition to this, the CGST Act under section 18 allows considering dies, moulds and jigs, refractory bricks, fixtures and jigs as scrap. By this, the registered person under GST Act may be liable to pay taxes on the transaction value of goods mentioned under section 15.
Input Tax Credit Reversal on Capital Goods
Written below are the situations when the ITC on the capital goods needs to be reversed:
When taxpayers are willing to pay tax under the composition scheme.
When supplied goods or services from the taxpayer gets exempted.
When there is a supply of capital goods, on which the taxpayer has already availed input tax credit.
When the taxpayer’s registration has been cancelled and the Input tax credit for the remaining useful life in months will be evaluated on prorata basis, considering useful life as five years.