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What are Capital Goods in GST?
In India, ‘capital goods’ under GST are defined in Section 2(19) of the Central Goods and Services Tax (CGST) Act. According to this definition, capital goods refer to items utilized or intended for use in the course or furtherance of business, with their value recorded as a capital asset in the taxpayer’s financial accounts. These goods play a significant role in input tax credit (ITC) eligibility, as they allow businesses to claim ITC based on their capital expenditure.
ITC on Capital Goods
Businesses can claim Input Tax Credits (ITC) on capital goods used in the course of or furtherance of business under the Goods and Services Tax (GST) framework. The eligibility criteria, conditions, and restrictions for capital goods ITC claims are briefly summarized below.
Related Read: ITC Reversal under GST Explained
Eligibility for ITC on capital goods:
1. Registered GST Taxpayers: Only GST-registered taxpayers qualify for claiming Input Tax Credit (ITC) on capital goods.
2. Business Use Requirement: Capital goods must be employed strictly for business purposes, including manufacturing or providing taxable services.
3. Capitalization in Financial Records: The value of capital goods must be capitalized in the business’s financial accounts.
4. Taxable Goods or Services: Capital goods should contribute to the production of taxable goods or services, as ITC is not available for items used to supply exempted goods or services.”
Related Read: What are the Cases Where ITC Is Not Applicable?
Conditions and Restrictions for Claiming ITC on Capital Goods:
1. Exclusive Use for Taxable Supplies
Input Tax Credit (ITC) is allowed if capital goods are used exclusively for taxable supplies. For mixed-use (both taxable and exempt), ITC must be claimed proportionately.
2. Depreciation on Tax Component
ITC is ineligible if the tax component is included in the depreciation claimed under the Income Tax Act, as double benefits are not permitted.
3. Blocked Credit Items
ITC cannot be claimed on capital goods intended for personal use or those used for constructing immovable property (except for plant and machinery).
4. Time Limit for ITC Claims
ITC must be claimed by the due date of the September return following the financial year or by the date of filing the annual return, whichever is earlier.
5. Reversal of ITC
If capital goods are subsequently used for exempt supplies or non-business activities, a proportionate reversal of ITC is required.
6. Invoice Documentation Requirement
Valid tax invoices or appropriate documentation are essential to claim ITC on capital goods.
Examples of Capital Goods in GST
Scenario: For ₹20,00,000, a textile production company invests in a state-of-the-art weaving machine to increase output. This machine is a vital business component and will only be used to produce taxable goods. ₹3,60,000 (18%) is the GST that is applied to the purchase.
GST treatment:
1. Capitalization in Accounts
In the company’s books, the machine’s cost, including GST, is recorded as a capitalized asset rather than an expense due to its long-term use and value in business operations.
2. Eligibility for Input Tax Credit (ITC)
Since the machine is exclusively used for business activities to produce taxable supplies, the business can claim ITC on the ₹3,60,000 GST paid. This credit helps reduce the company’s future GST liability on sales.
3. Process of Claiming ITC
To claim the Input Tax Credit, the company must hold a valid tax invoice from the supplier and submit its monthly GST return (Form GSTR-3B), claiming the ₹3,60,000 ITC. This amount offsets GST liability on the company’s outward supplies, optimizing tax obligations.
Related Read: Inverted Duty Structure with Example Explained
Frequently Asked Questions (FAQs)
1. What qualifies as capital goods under GST?
Capital goods under GST are defined as assets used or intended for use in business activities, which are capitalized in the taxpayer’s books of accounts. This includes machinery, equipment, and furniture used in the production of taxable goods or services.
2. Who is eligible to claim an Input Tax Credit (ITC) on capital goods?
Only GST-registered taxpayers can claim ITC on capital goods, provided these goods are utilized for taxable business activities and are capitalized in their accounts.
3. Are there any restrictions on claiming ITC for capital goods?
Yes, ITC cannot be claimed if capital goods are used for personal purposes, for exempt sales, or if the tax component is included in depreciation claimed under the Income Tax Act.
4. What happens if capital goods are later used for non-business purposes?
If capital goods are subsequently used for exempt or non-business purposes, the ITC claim must be reversed proportionately, impacting the overall tax credit.
5. Can depreciation affect the ability to claim ITC?
Yes, if the tax component of the capital goods is included in the depreciation claimed under the Income Tax Act, ITC cannot be claimed on that portion.
6. Can we claim 100% ITC on capital goods?
Yes, if the capital goods are used exclusively for taxable supplies. The ITC claim should be in proportion to the business or non-business use of the capital goods. ITC cannot be claimed for goods used exclusively for non-business purposes.
7. Is GST refunded on capital goods?
No, but you can claim an Input Tax Credit (ITC) to offset future GST liabilities.
