ITC ON CAPITAL GOODS.

Capital Goods

Statuary definition- As per Section 2(19) of the Central Goods and Services Tax (CGST) Act, 2017, unless the context otherwise requires, the term 'capital goods' means goods, the value of which is capitalized in the books of accounts of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

In Simple we can say that :- Capital goods are assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services.

Example- A freezer used in ice factory is termed as Capital Goods.

ITC Rules for Capital Goods under GST: RULE 43

We can easily analyse ITC rules through the chart given below-

1. No ITC on Capital Goods, if :-

• Purchased only for personal use
• Purchased only for supply of exempted goods.

2. ITC Available on Capital Goods if purchased for use in Normal course of business.

3. Proportionate ITC, if purchased Partly for Personal/Exempted and Partly for Normal sales. The credit of input tax shall be calculated in the following manner:

• ITC paid on purchase of Capital Goods shall be credited in Electronic Credit Ledger.
• Useful life of such Capital Goods shall be taken as 5yr. from the date of purchase.
• Now the whole amount of ITC credited in Electronic Credit Ledger shall be bifurcated over the useful life (5Yr.) of such Capital Goods. 

Calculations for common credit

-For exempted supplies
The amount of ITC attributable to exempt supplies out of common capital credit –



Remaining amount after deducting credit for exempt supplies will be allowed as ITC.

All the above calculations must be done separately for:

•  Central tax (CGST)

•  State Tax (SGST)

•  Union Territory Tax (UTGST)

•  Integrated Tax (IGST)

Capital Good which was earlier used or intended to be exclusively used for:

• Non- business purpose(Personal use) 

• Effecting exempt supplies

Subsequently used for Normal Sales

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

Example- Mr. Ram purchased a Freezer for Personal use only for ₨ 100000/- including GST of Rs 18000/- as input tax on 01/07/2017. On 10/09/2018 he intended to use Freezer for both Personal use and Normal Sales. Calculate eligible Common Input Tax Credit.

Ans- The Eligible Common Input Tax Credit = Input Tax - 5% of input tax for every quarter or part thereof.

• Total no. of Quarter from 01/07/2017 to 10/09/2018 = 5Quarter.

        = 18000 - (5% of 18000) * 5Quarter.
        = 18,000 – 4,500
        = 13,500

Now, this is the common credit available to Mr. Ram. He will credit Rs 13,500 to Electronic Credit ledger.
Now he will calculate the ITC attributable to exempted supplies as per the formula used in Point 3.
Common credit for 1 month = 13,500÷60=225.

Reversal of Input Tax Credit

Following are the circumstances where proportionate ITC will be reversed i.e. added to output tax liability of the Registered Person:-

• Where a normal taxpayer opts to pay tax under composition scheme or goods/services supplied by him become exempt;

• In case of supply of capital goods or plant and machinery, on which input tax credit has been taken;

• Every registered person whose registration is cancelled.

Input tax credit involved in the remaining useful life shall be computed on pro-rata basis, taking the useful life as five years.