GST · Input tax credit
How does input tax credit on capital goods work under GST?
Short answer
GST paid on capital goods used in business can be claimed in full in the month of receipt, if the asset is used for taxable supplies and you do not claim depreciation on the tax component. If it is used partly for exempt supplies, the credit is reversed over 60 months. If you sell the asset, you pay the higher of the credit taken (less 5 percentage points for each quarter of use) and the tax on the sale price.
What counts as capital goods
Goods whose value is capitalised in the books and which are used, or intended to be used, in the course of business. Examples: machinery, computers, furniture, generators.
Claiming the credit
- In full, at once. Unlike the old CENVAT rules, the whole credit can be taken in the month the goods are received.
- No depreciation on the tax. If you claim income-tax depreciation on the GST portion, the credit is not allowed (section 16(3)). Capitalise the asset net of GST.
- The time limit in section 16(4) applies as for any other credit.
- Blocked items stay blocked: cars, and buildings or civil structures. See blocked credits.
Common use for taxable and exempt supplies (rule 43)
| Use | Treatment |
|---|---|
| Only for taxable (including zero-rated) supplies | Full credit |
| Only for exempt supplies or personal use | No credit |
| For both | Credit goes into a common pool. The asset is given a life of 5 years (60 months); each month, 1/60th of the credit is apportioned and the share relating to exempt turnover is reversed |
Selling or removing the asset (section 18(6), rule 44(6))
Pay the higher of:
- the credit taken, reduced by 5 percentage points for every quarter (or part) since the invoice date; and
- the tax on the transaction value of the sale.
Example: Credit of ₹1,80,000 taken on a machine; sold after 9 quarters for ₹4 lakh + 18% GST (₹72,000). Reduced credit = 1,80,000 × (100 − 45)% = ₹99,000. Pay ₹99,000, the higher amount.
Refractory bricks, moulds, dies, jigs and fixtures sold as scrap pay tax on the transaction value only.
Other events
When you opt for composition, or the output becomes exempt, the credit on capital goods still held is reversed on the same basis (section 18(4)). For refunds, the credit on capital goods is generally excluded from the refund formula.
Legal basis
- Sections 2(19), 16(3), 17 and 18(6), Central Goods and Services Tax Act, 2017
- Rules 43 and 44(6), CGST Rules, 2017
Official sources
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