Query Reply -Input Tax Credit on Capital Goods on set up Rice mill

When any capital goods are used in manufacturing both exempt and taxable products, then according to the provisions of the Act, input tax credit is apportioned on the basis of taxable & exempt turnover of each month and life of capital assets goes. According to GST provisions, the life of capital assets is 60 months (5 years).

Now we will try to understand with an example how the apportionment of ITC will be done. Suppose you purchase plant & machinery at Rs. GST charged is Rs 60,000/-. You will avail this ITC fully.

After this Rs. 60,000/- will be divided over 60 months.

Rs. 60,000 ÷ 60 = Rs. 1000 ITC per month.

Now suppose your total sales of that month is Rs. 10,00,000 out of which taxable sales Rs. 7,00,000/- and exempt sales Rs. 3,00,000/-

ITC to be reversed = 1000*3,00,000/10,00,000 = 300

This month you will have to reserve ITC of Rs.300 and you will have to do this calculation every month because you do not know how much sales your product will have taxable and exempt in the next month.

Apart from this, there can be another doubt that the GST rate charged on the machinery purchased will be 18% and the GST rate on Rice sales is 5%, so will the unused ITC be refunded?

In this case you will not get refund of unused ITC.

In the case of inverted duty structure, refund is available when the rate of input goods is higher than the rate of output goods, but in the case of capital goods, the benefit of this provision is not available.

Section 17(1) & 17(2) of CGST: Apportionment of credit and blocked credits.-

(1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, 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.

Rule 43 (1) . Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.-

(1) Subject to the provisions of sub-section (3) of section 16, the input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-

(a) the amount of input tax in respect of capital goods used or intended to be used exclusively for non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall be indicated in FORM GSTR-3B  and shall not be credited to his electronic credit ledger;

(b) the amount of input tax in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero-rated supplies shall be indicated in FORM GSTR-3B  and shall be credited to the electronic credit ledger;

(c) the amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as 'A', being the amount of tax as reflected on the invoice, shall credit directly to the electronic credit ledger and the validity of the useful life of such goods shall extend up to five years from the date of the invoice for such goods:

Section 54(3) : Refund of tax.

(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than-

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council: