In India, capital goods under the GST framework refer to goods used by a business in the production of other goods or services and are not consumed in the production process itself. These assets are expected to provide long-term benefits and are part of the company's capital expenditure. Common examples include machinery, tools, and equipment used in the manufacturing process.
Capital goods are crucial for businesses as they enable production expansion and long-term efficiency. Under the GST regime, businesses are allowed to claim Input Tax Credit (ITC) on capital goods, which can significantly reduce their overall tax liability. This also includes tax components such as CGST, SGST, or IGST depending on the nature of the transaction.
GST Treatment for Capital Goods
When capital goods are purchased, the GST paid on them provides businesses with two main options:
- Capitalise the tax component as part of the cost of the asset and claim depreciation under the Income Tax Act.
- Avail Input Tax Credit (ITC) under the GST Act to offset output tax liability.
Each option has its own implications for financial planning and taxation. While capitalization affects long-term depreciation claims, availing ITC provides immediate tax relief, improving cash flow. However, businesses must ensure compliance with GST rules regarding usage and documentation.
Eligibility for ITC on capital goods
To avail Input Tax Credit on capital goods, the following conditions must be met:
- The business must have a valid GST registration.
- The capital goods should be used for taxable business activities.
- ITC cannot be claimed if depreciation is already claimed on the GST component under the Income Tax Act.
- The goods should not be used for personal purposes or exclusively for making exempt supplies.
- Proper tax invoices and accounting records must be maintained.
Learn more about input tax credit to understand how you can optimise your tax planning.
How to claim ITC on capital goods?
To claim ITC on capital goods, follow these steps:
- Ensure the supplier has charged GST on the invoice.
- The business must be registered under GST and eligible to claim ITC.
- Use the goods for taxable business purposes only.
- Do not claim depreciation on the GST component of the asset.
- File monthly GSTR-3B returns and report the eligible ITC under capital goods.
Maintaining accurate purchase and usage records is essential to avoid issues during GST audits or assessments.
Impact of GST on pricing of capital goods
GST has streamlined the tax structure on capital goods, reducing the overall cost and simplifying compliance. Its impact includes:
- Elimination of cascading taxes, reducing final costs.
- Uniformity in tax rates across states leading to consistent pricing.
- Input Tax Credit availability improving cash flow and affordability.
- Better predictability and transparency in procurement planning.
This makes capital investment more financially viable, particularly for MSMEs and manufacturing enterprises.
How is GST calculated on capital goods?
GST on capital goods is calculated by applying the relevant GST rate (such as 18% or 28%) to the invoice value of the asset. Depending on the type of transaction:
- For intra-state purchases, GST is split into CGST and SGST.
- For inter-state purchases, IGST is applied.
To simplify this calculation, businesses can use a reliable GST calculator to determine the exact tax liability on capital goods.
Conclusion
Capital goods are essential for business operations and long-term growth. Understanding their treatment under the GST regime helps businesses manage costs and maximise tax benefits. Claiming ITC on capital goods not only improves cash flow but also enhances profitability. For businesses looking to invest in capital goods, securing a business loan can provide the financial flexibility needed to make timely and strategic purchases.
