Capital goods under GST refer to assets such as machinery, equipment, or vehicles that are used or intended to be used in the course or furtherance of business and that provide economic benefits over a period of more than one year. These assets are in the nature of long-term investments that contribute to income generation and are not consumed immediately in the normal course of business operations.
Accordingly, it is essential that such assets are capitalised in the books of accounts and not treated as consumables or revenue expenditure.
Eligibility and Availment of ITC on Capital Goods under GST
ITC on capital goods is available under GST, subject to the fulfilment of prescribed conditions. A registered person must ensure that such capital goods are used or intended to be used in the course or furtherance of business. Where capital goods are used partly for non-business purposes or for making exempt supplies, the eligible ITC shall be restricted proportionately, in accordance with the provisions of the GST Rules.
One of the key advantages of the GST regime is that ITC on capital goods can be availed upfront, that is, in the same financial year in which the capital goods are purchased and received, provided all eligibility conditions are met. This enables businesses to offset the tax paid immediately, thereby improving cash flow and liquidity.
However, ITC shall not be available on capital goods classified as blocked credits under Section 17(5) of the CGST Act, even if such goods are used in the course or furtherance of business.
Restrictions on ITC for Capital Goods
If capital goods are used for personal purposes, for construction of immovable property (other than plant and machinery), or for motor vehicles meant for personal use, ITC cannot be availed. For example, ITC is blocked on equipment used in the construction of an office complex, except where such equipment qualifies as plant and machinery.
Apportionment and Reversal of ITC on Capital Goods
There are instances where capital goods are used for both taxable and exempt supplies. In such cases, the registered person is required to reverse ITC proportionately, in in accordance with the GST rules.
Under GST, Rule 43 prescribes the mechanism for apportionment and reversal of ITC on capital goods that are used for making both taxable and exempt supplies. For this purpose, the law deems the useful life of capital goods to be five years (60 months). Accordingly, the total eligible ITC on such capital goods is spread evenly over a period of 60 months.
Where a capital good is used exclusively for taxable supplies, the entire ITC is eligible. Conversely, where it is used exclusively for exempt supplies, no ITC is available. However, when a capital good is commonly used for both taxable and exempt supplies, the portion of ITC attributable to exempt supplies is required to be reversed on a monthly basis.
The monthly ITC attributable to the capital good is calculated by dividing the total ITC by 60. From this monthly amount, the portion relating to exempt supplies is determined based on the ratio of exempt turnover to total turnover for that the relevant tax period. This amount is required to be reversed by adding it to the output tax liability.
This mechanism ensures that ITC is availed only to the extent the capital goods are used for making taxable supplies, in strict compliance with GST law.
ITC and Depreciation on Capital Goods
As per Section 16(3) of the CGST Act, a specific condition is prescribed in relation to depreciation on capital goods. Where a registered person avails ITC on the GST paid on capital goods, depreciation on the GST component is not permitted under the Income-tax Act.
From an accounting perspective, this implies that while recording a capital asset in the books of accounts, the GST paid should be accounted for separately and should not be included in the capitalised cost of the asset. If the GST component is erroneously capitalised and depreciation is claimed on such amount, the corresponding ITC becomes ineligible under GST law.
Accordingly, accurate accounting treatment of capital goods is essential to ensure compliance with GST provisions and to prevent the loss of otherwise eligible input tax credit.
GST Implications on Sale or Disposal of Capital Goods
Where a registered person sells, scraps, writes off, or otherwise disposes of capital goods on which ITC has been availed, they are required to pay an amount equal to the higher of:
• the GST payable on the transaction value of such capital goods; or
• the ITC attributable to the remaining useful life of the capital goods.
For this purpose, the useful life of capital goods is considered to be five years, and the ITC originally availed is proportionately reduced from the date of the tax invoice. The resulting balance represents the ITC attributable to the remaining useful life of the asset.
This provision ensures that the registered person does not receive a dual benefit by availing ITC and subsequently disposing of capital goods without making the appropriate tax payment.
Refund of ITC on Capital Goods is Not Permitted
A registered person can claim a refund of unutilised ITC only in specific cases, such as zero-rated supplies made without payment of tax or when credit has accumulated due to an inverted duty structure. However, this provision explicitly excludes ITC availed on capital goods.. Consequently, you cannot claim a refund for ITC on capital goods under GST; such credit can only be utilised to pay output tax and cannot be converted into a cash refund.
A clear understanding and correct implementation of ITC provisions relating to capital goods is essential for every GST-registered business. While full ITC availability can significantly ease working capital pressures, it is equally important to comply with usage conditions, reversal requirements, and proper accounting practices. Mistakes such as availing credit on ineligible capital goods or incorrectly depreciating the GST component can result in disputes, interest, and penalties.
Moreover, since refund of ITC on capital goods is not permitted, businesses must assure that such credit is utilised only against output tax. To safeguard compliance and maximise benefits, it is advisable to seek professional guidance and regularly monitor capital goods ITC accounting.