Input Tax Credits : Where CAPITAL GOODS used partly for business and partly for others


In this article, we will discuss following two situations in respect to Input Tax Credits of Capital goods:-

  • Where the Capital goods used by the registered person partly for the purpose of any business and partly for other purpose. (In this case, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business).
  • Where the Capital goods are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies. (In this case, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies).

Please note this article does not related to input tax credits on inputs and input services.

Input tax credits are not allowed to full extent in case there is any or both above listed situations happened in business. In other words, only so much of credit is allowed which is related to taxable supplies.


There are following provisions under law for the input tax credits for Capital Goods:

(a)    Input tax credit will not be allowed to claim in respect of capital goods exclusively used for :

(i)      Non-business purposes

(ii)    Exempt supplies

Dealer has to report this in Form GSTR-2 and shall not be credited to his electronic Credit Ledger.

(b)   Input tax credit will be allowed to claim in respect of capital goods exclusively used for :

(i)      Supplies other than Exempt Supplies

(ii)    Zero Rated supplies

Dealer has to report this in Form GSTR-2 and shall be credited to his electronic Credit Ledger.

(c)    Input tax credits on Capital goods other than those mentioned in (a) and (b) to be claimed in the same month in which such assets purchased. These assets include credits on those assets which are used in common for Business/ Non-business purposes or taxable/exempt supplies.

After claiming full credit in the month of purchase, person has to calculate portion of credits relevant to exempt supplies and will have to pay in each month as Output tax Liability along with interest.

In this case, following process to be followed:

  1. Input tax credits on such common capital goods to be claimed in the same month in which such capital goods being purchased.
  2. Assessee will calculate at the end of each month, the proportionate share of tax credits used for the purpose of exempt supplies during such month.
  3. Such calculated value in step-II will be reported as Output tax liability along with interest in return of relevant month.

Process to calculate proportionate share of tax credits (of common capital goods) used for exempt supplies (as mentioned in Step – 2 above)

  • Useful life of such assets shall be taken as five years from the date of the invoice for such goods.
  • Calculate monthly amount of input tax credits on such common capital goods by dividing total common credits by sixty (60 months = 5 Years). Please note that such monthly calculation of assets will be started from the following month to the date of purchase. For instance, an asset purchased in July 2017, then, monthly calculation will commence from August 2017 onwards. (Such calculated amount to be denoted as ‘Tm’)
  • Make a sum total of all available monthly input tax credits ‘Tm’ (i.e. of those assets whose time span of 5 years not finished yet). (Such total amount to be denoted as ‘Tr’).
  • Calculate portion of credits relevant to exempted supplies (to be denoted as ‘Te’) using following formula:

Te = ( Exempt supplies ÷ Total Turnover )  x Tr

Exempt supplies include:-

nil rated supplies

exempt supplies

non-taxable supplies

supplies on which the recipient is liable to pay tax on reverse charge basis 

transactions in securities

sale of land

sale of building, subject to clause (b) of paragraph 5 of Schedule II

If value of both ‘Exempt Supplies’ and ‘Total Supplies’ not available in any tax period, values may be picked from last tax period.

  • The amount ‘Te’ (credits proportionate to exempted supplies) shall be computed separately for input tax credit of central tax, State tax, Union territory tax and integrated tax.

Ques 1: What if capital goods earlier used only for exempt supplies or non-business purposes subsequently used as Common capital goods for taxable as well as exempt supplies?

Ans:

In this case, amount of Credits calculated after reducing by 5% per quarter or part thereof from the amount of original input tax credits on such common goods till the date of conversion of its usage, shall be added as Input Tax Credits in Electronic Credit Ledger:

Credits available as on date of conversion = Total Credits of such asset minus 5% per quarter or part thereof

For Instance:

Total Input Tax Credits on the original date of Purchase

Rs 800.00

Less: 5% per quarter

Rs   40.00

Less: 5% of next quarter

Rs   40.00

Less: 5% of subsequent quarter and so on till the date of conversion to its usage

Rs  XX.00

Balance Input Tax Credits (on the date of conversion)

XXX.00

  • After this, all the process mentioned in clause (c) above to be followed. Please note that, life of an asset for the purpose of input tax credits is always taken as 5 years. Monthly amount (Tm) will be calculated on the basis of five years. However, payment of proportionate share (of exempt supplies) will be made till balance of tax credits (on the date of conversion) fully exhausted in calculation of Tm.

Ques 2 What if capital goods earlier used only for taxable supplies subsequently used as Common capital goods for taxable as well as exempt supplies?

Ans : In this case, dealer had already claimed full amount credit in electronic credit ledger in the month of purchases.

At the time of conversion of use of such Capital Goods as Common Goods, input tax credits proportionate to Exempt supplies will be required to pay to government as Outward Liability in the manner discussed in Clause (c) above.

For this, First of all, we will calculate input tax credits available as on date of conversion through following formula :

Credits available as on date = Total Credits of such asset minus 5% per quarter or part thereof

For Instance:

Total Input Tax Credits on the original date of Purchase

Rs 800.00

Less: 5% per quarter

Rs   40.00

Less: 5% of next quarter

Rs   40.00

Less: 5% of subsequent quarter and so on till the date of conversion to its usage

Rs  XX.00

Balance Input Tax Credits (on the date of conversion)

XXX.00

After this, all the process mentioned in clause (c) above to be followed. Please note that, life of an asset for the purpose of input tax credits is always taken as 5 years. Monthly amount (Tm) will be calculated on the basis of five years. However, payment of proportionate share (of exempt supplies) will be made till balance of tax credits (on the date of conversion) fully exhausted in calculation of Tm.

So, time period passed before the date of conversion will be reduced from 5 years to calculate monthly amount (Tm) of input tax credits.


Example:

Mr. A has purchased a Capital Asset on July 15, 2017 for Rs 10,00,000 paying GST of Rs 180,000/- on this. While filing GST return of July 2017, he has claimed full amount of credit of Rs 180000/- declaring asset used for taxable supplies only.

In Feb 2018, he realized that this capital asset is used for the purpose of taxable as well as exempt supplies.

What is the procedure to be followed by Mr A to reverse input tax credits of such asset against exempt supplies?

Ans: In the month of Feb 18, Mr A will follow the process given below:

  • Calculate Input tax credits available as on date of conversion against this asset:
Credits at the time of Purchase in July 2017

180,000.00

Less: Credits used in between July to Feb 2018

No. of Quarters passed :

1) 15 July 2017 to 14 October 2017

2) 15 October 2017 to 14 January 2018

3) 15 January 2018 to 1 Feb 2018

3 Quarters passed till Feb 2018

Reduction at the rate of 5% per Quarter

So, total reduction will be: Rs 180,000 x 5% x 3 = 27000/-

27000.00

Credits available in Feb 18

153,000.00

  • Calculate Input tax credits proportionate to Exempt Supplies:

1. Monthly amount of Credits against all supplies (Tm) = 180000 ÷ 60 = Rs 3000

2. Credits proportionate to Exempt supplies for the month = Rs 3000 x Exempt Supplies ÷ Total Supplies

3. Amount calculated in point 2 will be reported and paid as Outward liability in monthly return.

Please remember, Calculation and payment in point 2 and 3 will continue till Rs 153000/- exhaust in full in calculation of ‘Tm’ in point 1(i.e. 153000 ÷ 3000 = 51 months). For 51 months from Feb 2018, dealer will make calculation as per Point 2 and pay as per point 3.

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