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. On a perusal of section 73 and and74 will reveal that wrong availment of ITC is being treated as violation, irrespective of its 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

I. Emergence of Rule 43 and principles embedded therein
II. Express assumption taken by Rule 43 – does it hold goods in all situations?
III. Contradiction between Rule 43 and GSTR-3B
IV.Understanding Rule 43 – an easy digest of a complex drafting!
V. Situations not specifically covered by law
all above issues has been analyzed in this article at length at relevant places in the form of discussion.

I. Emergence of Rule 43 and principles embedded therein

Section 17(1) and section 17(2) are cause of creation of Rule 43. Section 17(1) specifies that ITC in respect of capital goods shall not be available to the extent these are used for non-business purposes. Similarly, section 17(2) specifies that ITC in respect of capital goods shall not be available to the extent these are used for effecting exempt outward supplies.

So, Rule 43 is based on following principles –

i. If inward supply of capital goods is used for effecting taxable outward supplies, then ITC shall be available in respect of such goods to the extent these are used for said purpose.
ii. 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.
iii. 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.
iv. 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.

ITC in respect of those capital goods shall also not be available, when such goods falls within the scope of section 17(5).

II. An express assumption taken by Rule 43 (for commonly used capital goods)

A capital good has a life of 5 years i.e. 60 months i.e. 20 quarters. So, ITC in respect of a capital goods shall be available over a period of 5years/60months/20 quarters. Rule 43 specifically uses 5% per quarter.

An implied intention of Rule 43

When we compare Rule 43 with Rule 42, there is no provision for annual recalculation in Rule 43 as in Rule 42. So, Rule 43 has been drafted in such a manner that calculation of credit for a particular tax period (month) must be accurate and final in that period itself.
In other words, as soon as a tax period (i.e. month) ends, self-assessment of 1/60th of the credit also must end. Noone needs revisit this 1/60th part in next tax period(s). Similarly, one can conclude that as soon a quarter ends, self-assessment of 5% for that quarter also ends. Rule 43 treats part of quarter as complete quarter for purpose of this computation exercise.

Some other aspects relevant for understanding Rule 43
One can take credit in respect of a capital goods as soon as four conditions as specified in section 16(2) are fulfilled, if not, credit is ineligible.

Let us analyze above concepts

Situation-1 Suppose certain capital goods were purchased and delivered on 20.07.2017 along with invoice of even date. IGST charged on invoice was Rs. 6,60,000. Till December 2017, it was being used exclusively for effecting exempt supplies. But, from January 2018 to June 2018, it was used commonly for effecting taxable supplies, exempt supplies and non-business purposes. After July 2018, it was used exclusively for effecting taxable supplies.

Since the capital goods were being used for effecting exempt supplies upto December 2017, ITC would have not been availed.

Monthly proportionate ITC = Total ITC ÷ 60 = 6,60,000 ÷ 60 = 11,000

ITC finalized upto December 2017 = monthly proportionate ITC × number of months lapsed

=11,000 × (months from July 2017 to December 2017)

= 11,000 × 6 = 66,000

So, out of Rs. 6,60,000, self-assessment of ITC of Rs. 66,000 has become final. In other words, since the capital goods were used from July 2017 to December 2017 (i.e. for 2 quarters) for effecting exempt supplies, proportionate amount of ITC i.e. Rs. 66,000 will stand disallowed. And the remainder of the available credit is fully available, for now

Note: definition of quarter may have different impact in different situations (we will discuss this later in this article)

Now, we will consider treatment of remaining amount of ITC of Rs. 5,94,000 i.e. 6,60,000-66,000.

For the month of January 2018, capital goods were used for common purposes. (Assuming requirement of section 16(3) is taken care; as entire Rule 43 itself is subject to section 16(3))

For this purpose, proviso to Rule 43(1)(c) read with Rule 43(1)(d) specifies that ITC in respect of commonly used capital goods (i.e. common credit) denoted by “A” [ or ƩA= 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 Rs. 5,94,000, balance credit should be granted to the registered taxable person.

When we move further, we seem to come upon an anomaly in 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 Rs. 9,900 i.e. 5,94,000/60 but it should logically have been Rs. 11,000 i.e., 6,60,000/60.

However, treatment flowing from the Rule is beneficial to taxpayer as can be seen below

Proportionate exempt part i.e. common credit attributable towards exempt supplies denoted by Te shall be calculated as under –

Te = (E÷F) × Tr

Where Tr = Ʃ Tm
E = Exempt turnover for the tax period i.e. for January 2018 in our example
F = Total turnover for the tax period i.e. for January 2018 in our example

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