Goods and Services Tax – GST – By: – Shashank Gupta – Dated:- 14-12-2018 – Determination and apportionment of input tax credit in respect of capital goods (Critical analysis of Rule 43 of Central Goods and Services Tax Rules, 2017) Input tax credit (the ITC) is the backbone of GST. In GST law as prevalent in India, on referring section 73 and section 74 of CGST Act, 2017 (the Act), one would appreciate that wrong availment of ITC is being treated as offence irrespective of it s actual utilization. In this article, rule 43 of CGST Rules, 2017 (the Rules) has been thoroughly discussed and critically analyzed so as to enable every reader to use this article as a ready reference. Rule 43 talks about ITC in respect of capital goods, so reference to any section in this article has been modified accordingly to concentrate on capital goods only. There are certain errors in drafting of rule 43, which we see with the flow of discussion. Issues to be analyzed Principles on the basis which rule 4
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to the extent these are used for said purpose. If inward supply of capital goods is used for effecting zero rated outward supply then ITC shall be available in respect of such goods to the extent these are used for said purpose. If inward supply of capital goods is used for effecting exempt outward supplies then ITC shall not be available in respect of such goods to the extent these are used for said purpose. If inward supply of capital goods is used for non-business purpose then ITC shall not be available in respect of capital goods to the extent these are used for said purpose. Since this a settled position of law that a rule cannot override the provisions of Act, so in addition to above, ITC in respect of those capital goods shall also not be available which falls within the scope of section 17(5). This point has been focused specifically because rule 43 is silent on ITC of such capital goods. An express assumption taken by rule 43 (for commonly used capital goods) a capital goods h
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soon as four conditions as specified in section 16(2) are fulfilled, if otherwise is not ineligible for credit. Let s analyze above concepts Situation-1 Suppose a capital goods was purchased and received on 20.07.2017 along with invoice of even date. IGST charged on invoice was ₹ 6,60,000. Till December 2017, it was being used for effecting exempt supplies. But from January 2018 to June 2018, it was used commonly for effecting taxable supplies, exempt supplies and for the purpose of business as well as non-business purpose. From July 2018 to September 2018, it was used exclusively for effecting taxable supplies. Turnover type January 2018 February 2018 March 2018 April 2018 May 2018 June 2018 Exempt 4 crores 5 crores 2.5 crores 4 crores 2 crores 3.5 crores Non-business 1 lakh 1 lakh 1 lakh 1 lakh 1 lakh 1 lakh Total 10 crores 15 crores 10 crores 20 crores 11 crores 12.25 crores Since upto December 2017, it was being used for effecting exempt supplies, ITC would have not been tak
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#425;A= Tc] shall be calculated as under – Input tax on such capital goods 6,60,000 Less: 5% for every quarter from date of invoice 66,000 (i.e., 6,60,000 × 5% × 2) TC = ƩA 5,94,000 Logically, if we exclude the proportionate exempt or non-business part from this ₹ 5,94,000, balance credit should be granted to the taxpayer. When we move further, we see an error in drafting of rule 43. Let s see this – As per rule 43(1)(e), proportionate monthly common credit (denoted by Tm; Tm = Tc / 60) on such goods shall be ₹ 9,900 i.e. 5,94,000/60 but it should logically be ₹ 11,000 i.e., 6,60,000/60. However, treatment given in rule is beneficial for the taxpayer. Let s see this – Proportionate exempt part i.e. common credit attributable towards exempt supplies denoted by Te shall be calculated as under – Te = (E÷F) × Tr as specified in rules logically Te = (4÷10) × 9900 = 3,960 Te = (4÷10) × 11,000 = 4,400 Where Tr = Ʃ
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ds to the extent these are used for said purpose. Since Act shall prevail, it is a suggestion that while calculating exempt turnover for the tax period i.e. January 2018 in our example, non-business turnover shall also be added. In this way, a reasonable amount attributable towards non-business purposes shall also be added to output tax liability. Non-business turnover can be determined by applying valuation rules. Calculation of ITC in respect of said commonly used capital goods from February 2018 to June 2018 Particulars Remark / calculation February 2018 (as per rules) March 2018 (as per rules) April 2018 (as per rules) May 2018 (as per rules) June 2018 (as per rules) Tr (Rs.) As per rules 9,900 9,900 9,900 9,900 9,900 +E (Rs.) As per rules 5 crores 2.5 crores 4 crores 2 crores 3.5 crores F (Rs.) As per rules 15 crores 10 crores 20 crores 11 crores 12.25 crores $ITC to be taken Nil Nil Nil Nil Nil *Amount to be added in output tax liability Te = (E÷F) × Tr (as per rules
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ases, proviso to rule 43(1)(d) has specified that in such case common credit (Tc) shall be calculated as under – Input tax on such capital goods – Less: 5% for every quarter lapsed from date of invoice – TC = ƩA – However, there is no need to take any ITC because ITC would have been taken on fulfillment of conditions of section 16(2) of the Act. Remaining procedure is exactly the same as discussed in situation-1. Note: in later part of this article, few situations have been discussed in respect of which law is silent. Impact of definition of quarter Definition of quarter as given in section 2(92) of the Act is equally important because as per definition, quarter is not a period of three months from one date to another date but is a period of three months being April to June, July to September, October to December and January to March between one date to another date. If we find out number of quarters from 27.09.2017 to 04.07.2018, then number of quarters as per definition shall be
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ed by 5% per quarter or part of the quarter? Whether ITC to be reversed shall be reduced by 1/60th per month or part of the month? Note: calculation on the basis of month may differ from the calculation on the basis of quarter. This becomes relevant to mention other related provisions like rule 32 where 5% per quarter has been used. similarly, again in rule 40, 5% per quarter has been used. But in rule 44, 1/60 per month has been used. This is matter of differences, so author reserves his views and leaves on learned members to decide on their own. When capital goods being used for common purposes are subsequently used exclusively for effecting taxable supplies Here actually, there is no need for specific provision because ITC would have already been credited in electronic credit ledger. When capital goods being used exclusively for effecting taxable supplies are subsequently used exclusively for effecting exempt supplies Undoubtedly, as per section 17(2) r.w. rule 43(1)(a), ITC shall b
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de whether – Whether full ITC to be taken? Whether ITC to be taken shall be reduced by 5% per quarter or part of the quarter? Whether ITC to be taken shall be reduced by 1/60th per month or part of the month? Author s view is that one must choose between b & c. Other issues Section 17(3) states that exempt supplies shall include sale of land and sale of complete buildings. So now question here arises whether normal ITC shall get hit by rule 43? Here one has to see that if any capital goods are being used for effecting exempt supply then only ITC shall not be available. So, one has to see if any particular capital goods were used for sale of land/said building, then only ITC shall be hit by rule 43 which author thinks is unlikely. Likewise, one has to see for other exempt supplies like sale of duty scrips etc. For other important points of Rule 43, one may download complete article written by author (approved by IDTC of ICAI) from – https://idtc-icai.s3-ap-southeast-1.amazonaws.com/
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