ITC on Capital Goods Calculation and Claim Process GST

Input Tax Credit, or ITC, is an essential feature in the GST scheme, with the inherent objective of reducing the output tax liability of businesses by the amount of tax paid on inputs. While most taxpayers are familiar with it in relation to goods and services, ITC on capital goods has a defined set of rules, conditions, and mode of calculation. This article lays down the procedure for asserting ITC on capital goods under GST.

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What Are Capital Goods under GST?

Capital goods refer to goods used in the course or furtherance of business that are not consumables but provide long-term value. These typically include:

Machinery and equipment
Vehicles used for production
Office infrastructure like computers, printers, servers
Furniture and fixtures used in business operations

As per Section 2(19) of the CGST Act, capital goods mean goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

Eligibility Criteria to Claim ITC on Capital Goods

You can claim ITC on capital goods if:

The capital goods are used for business purposes.
The invoice is available with you, and it includes your GSTIN.
The supplier has filed GST returns and paid the tax.
You have received the capital goods (actual possession).
You claim the ITC within the time limit prescribed (earlier of due date of September return of next financial year or date of annual return filing).
The capital goods are not specifically blocked under Section 17(5) (like personal vehicles, goods used for personal consumption, etc.).

Blocked ITC on Capital Goods under Section 17(5)

You cannot claim ITC on capital goods if:

Used for personal use.
Used for exempt supplies.
Used in the construction of immovable property.
Motor vehicles for personal transport (exceptions apply).

ITC Claim Process for Capital Goods

Step 1: Ensure the capital goods are capitalised

ITC is available only if the capital goods are recorded in the books as a capital asset (not revenue expense).

Step 2: Check Invoice and GST Compliance

Ensure the supplier’s invoice has proper GST details and the supplier has filed their GSTR-1 and GSTR-3B.

Step 3: File ITC in GSTR-3B

Report eligible ITC in Table 4A of GSTR-3B. ITC should also auto-populate from GSTR-2B, but you must reconcile.

Step 4: Claim full ITC at once

Unlike input services or goods used for both business and personal purposes (where ITC is proportionate), for capital goods fully used for taxable supplies, the entire ITC is claimable at once in the month of purchase.

Note: If capital goods are used partly for business and partly for exempt/non-business purposes, the ITC must be reversed proportionately under Rule 43 of the CGST Rules.

Rule 43 – Apportionment of ITC on Capital Goods

When to Apply Rule 43?

If capital goods are used for:

Both taxable and exempt supplies.
Business and non-business purposes.

Calculation under Rule 43:

T = Total input tax on capital goods.
A = Common credit = T – ITC attributable to exclusively taxable and exempt supplies.
Common credit A is spread over 60 months (5 years).
Every month, you need to reverse the proportionate ITC for exempt use using:

5. D = A × (E ÷ F)

Where:

E = turnover of exempt supplies.
F = total turnover.

Reversal amount D to be added to output liability every month.

Example of ITC on Capital Goods under Rule 43

Let’s say:

A company buys machinery worth ₹12,00,000 + 18% GST = ₹2,16,000.
Out of this, 40% is used for exempt supplies and 60% for taxable supplies.
ITC = ₹2,16,000
Proportionate credit = ₹2,16,000 × 40% = ₹86,400 (to be reversed over 60 months)

Monthly reversal:

= ₹86,400 ÷ 60 = ₹1,440/month

This amount should be reversed every month and added to output liability.

Capital Goods Sold Before 5 Years

If you sell or dispose of capital goods before 5 years (60 months), then:

Reversal of ITC:

You must reverse the higher of:

ITC taken reduced by 5% per quarter or part thereof from the date of invoice, or
Tax on transaction value of capital goods sold.

This is as per Rule 44(6) of the CGST Rules.

Important Points to Remember

Point	Description
Capitalization	Only capital goods recorded as fixed assets are eligible
Full Credit	Can be claimed in full in the same month unless Rule 43 applies
Reversal Rule	Apply Rule 43 for common use (taxable + exempt)
Sale of Goods	Reverse proportionate ITC or pay GST on transaction value, whichever is higher
Blocked Credit	Vehicles, personal use goods, and immovable property construction are restricted
Premature Disposal	ITC reversal is mandatory if goods are disposed of within 5 years.

Conclusion

Claiming ITC on capital goods under GST can significantly reduce your tax burden if handled correctly. Businesses must keep accurate records, understand the rules of apportionment and reversal, and ensure compliance with timelines and documentation. By effectively planning capital purchases and understanding Rule 43, taxpayers can maximize their eligible input credit and avoid unnecessary reversals or penalties.

FAQs on ITC for Capital Goods

Q1. Can ITC on capital goods be claimed in full in one go?
Yes, if the capital goods are used exclusively for business and taxable supplies, ITC can be claimed fully in the same month.

Q2. Can I claim ITC on second-hand capital goods?
Yes, ITC is allowed even on used machinery, provided GST was paid during purchase and all conditions are fulfilled.

Q3. What happens to ITC if capital goods are lost or stolen?
ITC must be reversed if capital goods are lost, stolen, or destroyed, as per Section 17(5).

Q4. Do I need to reverse ITC after 5 years?
No, reversal under Rule 43 is only for 60 months. After 5 years, no reversal is needed.

ITC on Capital Goods Calculation and Claim Process GST