In case of sale of capital goods under GST, the tax liability for the same has to be calculated in a special manner. The treatment of Capital goods under GST is covered under the below sections:
1. Section 18 (6) of the CGST Act
2. Schedule I of the CGST Act
3. Schedule II of the CGST Act
4. Rule 44 of the CGST Rules
Section 18(6) of the CGST act simply states that in case of sale of capital goods, any credit taken in respect of capital goods has to be reversed as calculated as per Rule 44 and added to the output tax liability for the month. The resulting amount of reversal will be the tax liability on the sale of capital goods or the tax on the transaction value of capital goods, whichever is higher.
Schedule II determines the situations where the sale of capital goods is a taxable event. According to Schedule II the following conditions should be satisfied for sale of capital goods to be a taxable event
1. The goods should form part of business assets
2. They are so transferred that they no longer form part of business.
3. They are transferred under the instructions of the person carrying on the business.
Note:- The assets should be sold by the person carrying on the business. Hence in case of calamity like fire, accident, theft there will be no liability to pay tax.
Schedule I states that permanent disposal of assets even if made without consideration has to be treated as supply where ITC has been availed on such assets. This means that even writing off of capital goods will be treated as a taxable event.
The above provisions are mentioned in the CGST act . For valuation purposes we have to look at the rules for sale of capital goods. Rule 44 contains the procedure for sale of capital goods. This is where the provision gets very complicated and requires special attention.
Rule 44 states that ITC taken on capital goods shall have to be reversed in case of sale on a pro rata basis where the useful life of any capital goods will be taken as 5 years. The rule is explained via an example below:
Suppose the ITC taken on an Asset of Rs 50000 is 50000*18% i.e Rs 9000 and actual sale value is Rs 4000. Tax paid on actual sale value = 4000*18%= Rs 720. The ITC to be reversed will be as below:
One of the fundamental features of GST is the seamless flow of input credit across the chain (from the manufacture of goods till it is consumed) and across the country.
In this article, we will cover the following topics:
What is input tax credit?
Who can claim ITC?
What can be claimed as ITC?
Reversal of Input Tax Credit
Reconciliation of ITC
Documents required for claiming ITC
Special cases of ITC
ITC for Capital Goods
ITC on Job Work
ITC provided by the Input service distributor (ISD)
ITC on Transfer of Business
1. What is input tax credit?
Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.
When you buy a product/service from a registered dealer you pay taxes on the purchase. On selling, you collect the tax. You adjust the taxes paid at the time of purchase with the amount of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to be paid to the government. This mechanism is called utilization of input tax credit.
For example- you are a manufacturer: a. Tax payable on output (FINAL PRODUCT) is Rs 450 b. Tax paid on input (PURCHASES) is Rs 300 c. You can claim INPUT CREDIT of Rs 300 and you only need to deposit Rs 150 in taxes.
2. Who can claim ITC?
ITC can be claimed by a person registered under GST only if he fulfills ALL the conditions as prescribed.
a. The dealer should be in possession of tax invoice
b. The said goods/services have been received
c. Returns have been filed.
d. The tax charged has been paid to the government by the supplier.
e. When goods are received in installments ITC can be claimed only when the last lot is received.
f. No ITC will be allowed if depreciation has been claimed on tax component of a capital good
A person registered under composition scheme in GST cannot claim ITC.
3. What can be claimed as ITC?
ITC can be claimed only for business purposes. ITC will not be available for goods or services exclusively used for: a. Personal use b. Exempt supplies c. Supplies for which ITC is specifically not available
4. Reversal of Input Tax Credit
ITC can be availed only on goods and services for business purposes. If they are used for non-business (personal) purposes, or for making exempt supplies ITC cannot be claimed. Apart from these, there are certain other situations where ITC will be reversed.
ITC will be reversed in the following cases-
1) Non-payment of invoices in 180 days– ITC will be reversed for invoices which were not paid within 180 days of issue.
2) Credit note issued to ISD by seller– This is for ISD. If a credit note was issued by the seller to the HO then the ITC subsequently reduced will be reversed.
3) Inputs partly for business purpose and partly for exempted supplies or for personal use – This is for businesses which use inputs for both business and non-business (personal) purpose. ITC used in the portion of input goods/services used for the personal purpose must be reversed proportionately.
4) Capital goods partly for business and partly for exempted supplies or for personal use – This is similar to above except that it concerns capital goods.
5) ITC reversed is less than required- This is calculated after the annual return is furnished. If total ITC on inputs of exempted/non-business purpose is more than the ITC actually reversed during the year then the difference amount will be added to output liability. Interest will be applicable.
The details of reversal of ITC will be furnished in GSTR-2. To find out more about the segregation of ITC into business and personal use and subsequent calculations, please visit our article.
5. Reconciliation of ITC
ITC claimed by the person has to match with the details specified by his supplier in his GST return. In case of any mismatch, the supplier and recipient would be communicated regarding discrepancies after the filling of GSTR 3. Please read our article on the detailed explanation of the reasons for mismatch of ITC and procedure to be followed to apply for re-claim of ITC.
6. Documents Required for Claiming ITC
The following documents are required for claiming ITC: 1. Invoice issued by the supplier of goods/services 2. The debit note issued by the supplier to the recipient (if any) 3. Bill of entry 4. An invoice issued under certain circumstances like the bill of supply issued instead of tax invoice if the amount is less than Rs 200 or in situations where the reverse charge is applicable as per GST law. 5. An invoice or credit note issued by the Input Service Distributor(ISD) as per the invoice rules under GST. 6. A bill of supply issued by the supplier of goods and services or both.
All these documents are to furnished at the time of filing form GSTR-2.
7. Special cases of ITC
a. ITC for Capital Goods
ITC is available for capital goods under GST.
However, ITC is not available for- i. Capital Goods used exclusively for making exempted goods ii. Capital Goods used exclusively for non-business (personal) purposes Note: No ITC will be allowed if depreciation has been claimed on tax component of capital goods.
b. ITC on Job Work
A principal manufacturer may send goods for further processing to a job worker. For example, a shoe manufacturing company sends half-made shoes (upper part) to job workers who will fit the soles. In such a situation the principal manufacturer will be allowed to take credit of tax paid on the purchase of such goods sent on job work.
ITC will be allowed when goods are sent to job worker in both the cases:
From principal’s place of business
Directly from the place of supply of the supplier of such goods
However, to enjoy ITC, the goods sent must be received back by the principal within 1 year (3 years for capital goods).
c. ITC Provided by Input Service Distributor (ISD)
An input service distributor (ISD) can be the head office (mostly) or a branch office or registered office of the registered person under GST. ISD collects the input tax credit on all the purchases made and distribute it to all the recipients (branches) under different heads like CGST, SGST/UTGST, IGST or cess.
d. ITC on Transfer of Business
This applies in cases of amalgamations/mergers/transfer of business. The transferor will have available ITC which will be passed to the transferee at the time of transfer of business.
Please visit our other articles discussing ITC under GST in detail.