GST input tax credit on capital goods

Under section 2(19) of the CGST Act, 2017, capital goods are goods whose value 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. The test therefore follows your accounting: if an item is capitalised as property, plant and equipment, its GST is a question of capital goods credit; if it is expensed, it is an ordinary input.

This link to the books is why the fixed asset register and the GST working must agree. The register decides what is capitalised, and the GST treatment decides how much of the invoice becomes cost.

Section 16 sets the general conditions. In outline, a registered person may take credit on capital goods used in the course or furtherance of business only if:

• they hold a tax invoice or debit note issued by a registered supplier;
• the details of that invoice have been furnished by the supplier and communicated to the recipient (in practice, they appear in the recipient's auto-generated statement);
• the goods have been received;
• the tax charged has actually been paid to the Government by the supplier; and
• the recipient has furnished its own return under section 39.

There is also a time limit. Section 16(4), as amended, does not allow credit on an invoice to be taken after 30 November following the end of the financial year to which the invoice relates, or after the annual return is furnished, if earlier. Time limits in this area have been amended more than once, so confirm the limit that applies to a particular invoice with your adviser before relying on it.

Payment terms matter too. Under the second proviso to section 16(2), credit taken on an invoice that is not paid to the supplier within 180 days must be reversed, with the option to re-claim it when payment is made. For large capital purchases on long credit, this deserves a check at each month end.

Section 16(3): credit or depreciation, never both

If the registered person has claimed depreciation on the tax component of the cost of capital goods under the Income-tax Act, input tax credit on that tax component is not allowed. The choice is made once per invoice line: either the credit is taken and the tax is kept out of cost, or the tax is capitalised and depreciated and no credit is taken.

Section 17(5) lists items on which credit is not available even when they are used in business. Three entries matter most for fixed assets.

What 'plant and machinery' covers

For these clauses, plant and machinery means apparatus, equipment and machinery fixed to earth by foundation or structural support and used for making an outward supply, including that foundation and support. It excludes land, buildings and other civil structures, telecommunication towers, and pipelines laid outside the factory premises. So the foundation for a machine can carry credit, while the factory shed around it does not. 'Construction' includes renovation, additions, alterations and repairs to the extent they are capitalised.

Section 17(5)(h) also blocks credit on goods that are lost, stolen, destroyed or written off. How this applies to a capital good written off after years of use is a point to settle with your adviser.

Many businesses use the same asset for both taxable and exempt supplies. Rule 43 of the CGST Rules handles this with a simple model:

1. Credit on capital goods used only for exempt supplies or only for non-business purposes is not taken.
2. Credit on capital goods used only for taxable supplies is taken in full.
3. Credit on capital goods used for both is taken into a common pool. Each month, one-sixtieth of that credit (the useful life being taken as five years) is attributed to the period, and the part relating to exempt supplies, in the ratio of exempt turnover to total turnover, is reversed.

If an asset moves from exclusive use to common use, the credit is brought into the common pool after reducing it by the months already used. The reversal is a GST cost; FixedAsset Pro's default is to expense it rather than add it to the asset, a treatment your Chartered Accountant should confirm.

When capital goods on which credit was taken are supplied, the registered person must pay an amount equal to the higher of:

• the input tax credit taken on those goods, reduced by 5 percentage points for every quarter or part of a quarter from the date of the invoice (Rule 40(2)); or
• the tax on the transaction value of the sale.

A proviso allows refractory bricks, moulds and dies, jigs and fixtures supplied as scrap to pay tax on the transaction value alone.

AS 10 and Ind AS 16 include in cost only taxes that are not refundable. GST on which credit is claimed is recoverable, so it is not part of cost. Blocked or otherwise unavailable GST is a non-refundable tax and is capitalised.

For a blocked-credit car, the effect runs the other way. A car invoiced at ₹16,50,000 with ₹4,62,000 of GST and cess blocked, and ₹42,500 of registration charges, is capitalised at ₹21,54,500 in both books.

On a sale, the Companies Act gain or loss is worked out on proceeds excluding GST, and the same ex-GST proceeds reduce the Income-tax block. You can test the block effect with the Income-tax depreciation calculator, and the book vs tax reconciliation guide explains how the differences carry forward.

To support both the credit and the asset cost, keep the following on each capital purchase line: vendor GSTIN, HSN or SAC, taxable value, CGST, SGST, IGST and cess, whether credit is eligible, whether it was claimed, the tax capitalised, and the invoice date. The invoice date is what the section 18(6) quarter count runs from, so it should never be overwritten by the capitalisation date.

A simple rule catches most errors: if credit was claimed, capitalised tax must be zero. A register that enforces that rule cannot drift into claiming both. The fixed asset register format guide shows where these columns sit in a register.