What is capital goods?Capital goods are assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services. For example, a blast furnace used in iron and steel industry is a capital asset for the steel manufacturer. Difference between capital goods & other inputs Let us take an example. You are making a cake in your oven. You add ingredients eggs, water, flour, butter. These are your inputs. The cake is your final product. The oven is the capital good which helps you to make the cake. Inputs are consumed while making the final product and are treated as business expenses as cost of production. Capital goods are not consumed when the final product is made. They are not consumed in a single year of production. Therefore, they cannot be entirely deducted as business expenses in the year of their purchase. Instead, they are depreciated over the course of their useful lives. The business recognises part of the cost each year through accounting techniques as depreciation, amortization and depletion. What is credit on 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 rate. 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.
What is Common Credit?Businesses often use the same assets and inputs for both business & personal use. For example, Ms. Anita is a freelance designer and blogger. She has a personal laptop which she also uses for her freelance work. She can claim the input credit of GST paid on purchase of laptop only to the extent it pertains to her freelance business. Ms. Anita has also purchased a special designing software. Since this pertains only to her business, she can claim full ITC on this.
Why is common credit important?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 enjoy 0% GST. 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. The following calculations will help you to calculate the common credit that is attributable to personal supplies & exempted supplies leaving behind only the portion that pertains to taxable sales. Only that amount can be claimed as ITC. The credit that is attributable to personal supplies & exempted supplies must be reversed in GSTR-2. Click here to find out the reversal process in GSTR-2.
Types of ITC for Capital GoodsLet us take each case one by one.
A. Capital Goods used only for Personal Use or for Exempted SalesNo 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. Example 1: Personal Purchases Ms. Anita has purchased a fridge. Since this is not required for her business, i.e., a purely personal purchase, she will not be able to claim any ITC on the GST paid for the fridge. Example 2: Capital Goods used for exempted sales Mr. Avinash has purchased a small flour mill in his grocery shop to grind wheat grains to flour. Since he is producing unbranded flour it is exempted from GST. As it is an exempted sales, he cannot claim any ITC on the GST paid for the mill.
B. Capital Goods used for normal salesXYZ has purchased machinery to manufacture shoes. Since, shoes are normal taxable supplies, the GST included paid while purchasing machinery will be completely available as ITC. This shall be indicated in FORM GSTR-2 and shall be credited to the electronic credit ledger.
C. Common 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
Calculations for common credit
C.1 For exempted suppliesThe 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
- State Tax
- Union Territory Tax
- Integrated Tax
C.2 What happens if one starts using an asset for exempt goods also for taxable goods?If a capital asset was earlier used exclusively used for:
- Personal purpose OR
- Selling exempted goods
- Business and personal purpose OR
- Effecting taxable and exempt supplies
=56.25This amount 56.25 will be reversed in GSTR-2 under Table 11 ITC Reversal.
Reversal of credit under certain circumstancesIn the following circumstances the proportionate ITC will be reversed i.e. added to output tax liability in GSTR-2:
- 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
- Where a normal taxpayer opts to pay tax under composition scheme or goods/services supplied by him become exempt- FORM GST ITC-03
- Registration is cancelled- FORM GSTR-10