‘Capital Good’ in GSTis the frequent term that the businesses come across during the transactions.
Capital goods under GST are the inevitable part of the transactions and thus understanding the ITC rules for them becomes important.
In this short article, we will look at the ITC rules that apply for Capital Goods under GST and also look at the goods that are classified as ‘Capital Goods’.
What are Capital Goods under GST?
According to Section 2, sub-section 19 of the CGST Act of 2017, the term ‘Capital Good’ is defined as the good whose value is CAPITALIZED in the ‘Books of accounts’.
It is essential that these goods are to be used for the furtherance of business purposes ONLY.
Capital Goods can be anything ranging from a vehicle used for a business purpose or heavy machinery used in the production process.
Businesses can avail of Input Tax Credit under GST for the GST paid on the purchase of these capital goods.
NOTE:
Businesses must note that the goods that are NOT capitalized or are NOT debited to the respective asset account can NOT avail any Input Tax Credit for the same.
‘SERVICES’ shall NOT be considered in the ‘CAPITAL GOODS’ category.
Understanding Capital Goods with an example
A firm buys a ‘Tempo Traveller’ for the purpose of transportation facility for his employees.
Now, this is a good that will be used for the business purpose.
Let us look at the breakup of the amount paid on this purchase:
| Cost of the vehicle
|
₹ 5, 00,000 |
| GST of 28%
|
₹ 1, 40,000 |
| The aggregate cost of the vehicle | ₹ 6,40,000
|
Now, if this firm capitalizes the taxable value of this vehicle purchase in its Balance Sheet, then this vehicle will be considered as a ‘Capital Good’ for claiming the GST Input Tax Credit.
However, if the business adds this purchase to the profit & Loss Account, then this good shall NOT be determined as the Capital Good from the GST perspective.
Instead, this vehicle will be classified under the ‘Input Goods’ head & you shall not be allowed to avail Input Tax Credit for this purchase.
Are software considered to be a capital good?
We frequently get this query from our readers that are the soft wares used by businesses considered as capital goods?
Can we claim an Input Tax Credit under GST on these purchases?
The answer is simply, NO!
Businesses can NOTcategorize software as ‘Capital Goods’.
Even if the businesses capitalize this purchase in their balance sheets, they will still NOT be able to claim any Input Tax Credit on these purchases.
According to Schedule 2 of the CGST Act of 2017, it is clear that the software that businesses use is classified under ‘INPUT SERVICES’.
How to claim ITC on Capital Goods?
Let me give you a simple example to make you understand the process of claiming eligible Input tax Credit on Capital Goods’ purchases.
Suppose a business ‘GSTHero Associates’ buys 50laptop machines for its office use worth ₹ 7, 00,000.
This purchase was completed in June 2021.
Total GST paid (28%) = ₹ 1, 96,000
Total taxable value of this purchase = ₹ 7, 00,000
Now, this firm ‘GSTHeroAssociates’ adds this transaction in its books of accounts&capitalizes it.
Now, the laptops in this transaction will be considered as the ‘Capital Goods’ from the GST perspective.
They will now be able to avail eligible GST Input Tax Credit for this purchase.
Now the question in front of this business is that, can we claim the Input Tax Credit for this purchase in the current month (June’ 21) or should the ITC be claimed proportionately?
Solution:
This firm can immediately claim ITC for this purchase in the current month itself.
However, there are certain conditions that are to be followed:
- The registered business is not allowed to SELL these Capital Goods.
- The registered business CAN NOT Remove/Discard these capital goods for 5 Years (20 quarters) from the date of issuance of the invoice.
What if the business wishes to sell the laptops after 1 year use?
- It’s essential that the Capital Good has to be used for 5 years or 20 quarters.
- However, if a business wishes to sell any of its capital goods before the time limit of five years, then there are certain methods that the businesses need to adopt.
According to the Section 18 (6) of the CGST Act of 2017 defines TWO different ways to do so:
Method 1:
For example, this firm wishes to sell the capital goods after using them for two years:
Amount received on selling 50 laptops = ₹4, 00,000
GST Collected (28%)= ₹1, 12,000
This GST amount collected from the buyer will be completely payable as the outward tax liability.
GST paid to the government on this transaction = ₹1, 12,000
Method 2:
Now suppose that this firm has used the laptops for five complete years& then decides to sell them.
In this case, the business shall be allowed to avail 100% of Input Tax Credit on this transaction.
But the calculation changes when the business tries to sell these goods after using it for less than 20 quarters.
Example- Businesses use the laptops for just 8 quarters& then decide to sell, then the rule changes as follows:
If 100% ITC is allowed for using the Capital Good for 20 quarters, then for each quarter 5% ITC is allowed.
Now, here the business has used the Capital Goods for2 years (8 quarters),
Here, the Input Tax Credit allowed for the business will be 8 * 5% = 40%
The remaining 60% amount of the ITC shall be payable to the government as an Outward Tax Liability.
The total ITC availed on the PURCHASE of these 50 laptops was, say ₹ 1, 96,000
From this, we can calculate the total amount payable to the Govt. as an outward tax liability would be,
1,96,000 * 60% = ₹1,17,600
In short,
| ITC that business can avail | 78,400 |
| Business to pay to govt. as outward tax liability | 1,17,600 |
In a nutshell
In this short article, we discussed about the categorization of Capital Goods.
We also learned about the rules to claim Input Tax Credit under GSTon these Capital Goods.
It’s essential that the businesses claim only the eligible ITC. Claiming of ineligible ITC can attract a GST audit by department which can cause a loss of reputation for the business.