Can You avail Input tax credit on capital goods under GST law

Input tax credit for GST paid on capital goods is allowed in the first year itself as it is considered as goods. In this article, we will be discussing what is a capital asset and how to avail input tax credit of GST paid on capital goods and what are the exceptions.

As per section 2(19) of CGST Act, capital goods means goods, the value of which is capitalised in the books of account of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.

Capital goods shall include plant and machinery. Plant and machinery means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural support but excludes-

  • Land, building or any other civil structures,
  • Telecommunication towers, and
  • Pipelines laid outside the factory premises

When input tax credit not allowed for GST paid on capital goods

As per section 16(3) of CGST Act, if a registered taxable person has claimed depreciation under the income tax act,1961 on the GST component of the cost of capital goods, then such person is not allowed to claim input tax credit on the said tax component.

For example, let’s assume XYZ corporation has purchased capital goods for Rs 236 lakhs, out of which Rs 36 lakhs is paid towards GST and balance is net value of the capital goods. In this case, to claim an input tax credit of Rs 36 lakhs, you have to claim depreciation on the net value of capital goods, which is Rs 200 lakhs. If you claim depreciation on Rs 236 lakhs under income tax act while calculating your taxable income, then you can not claim an input tax credit for Rs 36 lakhs (GST paid on capital goods).

Pipelines which are laid outside the factory and telecommunication towers fixed to earth by foundation or structural support including foundation and structural support are not eligible for input tax credit.

Removal of capital goods after use

If the registered person has supplied capital goods or plant and machinery on which such person has already taken input tax credit, then the person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by 5% per quarter or part thereof from the date of invoice or the tax on transaction value of such capital goods or plant and machinery, whichever is higher.

Input tax credit pertaining to the remaining useful life of the capital goods should be computed separately for ITC of CGST, SGST/UTGST and IGST.

If the amount calculated exceeds the tax payable on the transaction value of the capital goods, such amount needs to be paid and thus, should be added to the output tax liability.

List of capital goods on which input tax credit not allowed

Motor vehicle

Motor vehicle for transportation of persons having approved seating capacity of not more than 13 persons including the driver. However input tax credit will be allowed in cases if a motor vehicle is used for following taxable supplies:-

  • Further supply of such vehicle or conveyance, or
  • Transportation of passengers, or
  • Imparting training on driving such motor vehicle, or
  • Transportation of goods.

In case of used cars, suppliers can take credit of GST paid by them while buying cars from owners. GST received while selling the car to another buyer, you need to avail input tax credit.

As per section 2(76) of CGST and SGST Act, motor vehicle has the meaning assigned to it in section 2(28) of motor vehicle act,1988. As per this section, motor vehicle or vehicle means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from external of internal sources and includes a chassis to which a body has not been attached and a trailer; but does not include:-

  • A vehicle running upon fixed rails or
  • Vehicle of a special type adapted for use only in factory or any other enclosed premises, or
  • A vehicle having less than 4 wheels fitted with an engine capacity of not exceeding 25 cubic centimetres.

Based on this definition, ITC of GST paid on trippers, and dumpers will be available as these are not motor vehicles as per motor vehicle act.

Vessels and/or Aircrafts

ITC is also not allowed in case of a vessel or airport except when they are used for transportation of goods or for making following taxable supplies:-

  • Further supply of such vessels or aircraft;or
  • Transportation of passengers; or
  • Imparting training on navigating such vessels; or
  • Imparting training on flying such aircraft

General insurance, servicing, repair and maintenance of motor vehicles, vessels or aircrafts

Even input tax credit on services of general insurance, servicing, repair and maintenance insofar as they relate to motor vehicles, vessels or aircrafts are not available. However, if such services of general insurance, servicing, repair and maintenance is used for any exceptional purpose as specified above for which ITC is allowed on motor vehicle, vessel or aircraft, then input tax credit available on such services of general insurance, servicing, repair and maintenance is allowed as an input tax credit.

In addition to the above, input tax credit in respect of such services shall also be available where it is received by a taxable person engaged in the manufacture of such motor vehicle, vessel or aircraft. ITC in respect of such services is also available where the taxable person is engaged in the supply of general insurance services in respect of such motor vehicles, vessels or aircrafts insured by him.

If capital goods are partly used for the purposes of business and partly used for other purposes or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies then, input tax credit shall be attributed to the purposes of business or for effecting taxable supplies as per rule 43 of CGST Rules.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.