Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases
Rule 8(1) of draft GST ITC Rules clause c,d & e provides as follows:
(c) the amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as ‘A’, shall be credited to the electronic credit ledger and the useful life of such goods shall be taken as 5 years:
Provided that where any capital goods earlier covered under clause (a) is subsequently covered under this clause, the value of ‘A’ shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof and the amount ‘A’ shall be credited to the electronic credit ledger;
(d) the aggregate of the amounts of ‘A’ credited to the electronic credit ledger under clause (c), to be denoted as ‘Tc’, shall be the common credit in respect of capital goods for a tax period:
Provided that where any capital goods earlier covered under clause (b) is subsequently covered under this clause, the value of ‘A’ arrived at by reducing the input tax at the rate of 5 percentage points for every quarter or part thereof shall be added to the aggregate value ‘Tc’;
(e) the amount of input tax credit attributable to a tax period on common capital goods during their residual life, be denoted as ‘Tm’ and calculated as:-
Tm= Tc÷60
Issue
The formula given in clause (e) for calculating input tax credit on common capital goods for a tax period is by dividing aggregate of common input tax credit on capital goods with 60. Thus, even if any capital goods exclusively used for exempted or taxable supplies, say for a period of 2 years, is commonly used thereafter, the common credit pool would only cover the credit attributable to balance life i.e. 3 years but monthly common credit would still be arrived at after dividing the common credit pool by 60 even if it contains some capital goods whose effective life is less than 60 months.
Further, clause (h) of sub-rule (1) provides that common input credit attributable towards exempted supplies should be added to the output tax liability of the person making such claim of credit for every tax period of the residual life of the concerned capital goods along with applicable interest. This interest is demanded in respect of unwanted credit.
Suggestion
It is suggested that:
a) the amount of input tax credit attributable to a tax period on common capital goods be allowed to be computed for each capital goods depending upon its residual life
b) the reversal on such account only be added to the output liability for the said month and not any interest thereon. Even if the interest is payable, it be clarified whether it is payable from the first day of the availment of credit till every month of reversal or for one month for every reversal.
Alternatively, it is suggested that a mechanism be provided for the registered person to avail the credit every tax period instead of reversal which will avoid payment of any interest
Also, replace in 8(1)(h) the interest payable to ‘…reverse immediately when credit no longer required but pay interest in case reversal is delayed….’
Source ICAI Suggestions on GST Rules Submitted to Govt of India