ITC on capital goods under GST

Input tax credit on capital goods is fully available where the goods are used for taxable business supplies, claimed upfront in the period of receipt. Two cautions apply: ITC is not allowed on the tax component if depreciation is claimed on it under the Income-tax Act (Section 16(3)), and Rule 43 apportions credit where capital goods are used commonly for taxable and exempt supplies over 60 months.

Full credit, claimed upfront

Unlike the earlier regime, GST allows ITC on capital goods (plant, machinery, equipment) to be claimed in full in the period of receipt, subject to the usual Section 16 conditions — valid invoice, receipt of goods, supplier's tax paid, and reflection in GSTR-2B. There is no staggering for purely taxable use.

The depreciation bar: Section 16(3)

Section 16(3) provides that if a registered person claims depreciation on the tax component of the cost of capital goods under the Income-tax Act, the ITC on that tax component is not allowed. So you choose: capitalise the GST and claim depreciation on it, or claim ITC on the GST and depreciate only the base cost. For a taxable business, claiming ITC is usually more valuable than depreciating the tax.

Mixed use: Rule 43

Where capital goods are used commonly for taxable and exempt supplies, Rule 43 spreads the common credit over 60 months (a five-year useful life) and reverses the exempt-attributable portion each month, mirroring Rule 42 for inputs. The monthly reversal is: common credit ÷ 60 × (exempt turnover ÷ total turnover).

Reversal on disposal: Rule 44 / Section 18(6)

On sale of capital goods on which ITC was taken, the supplier must pay the higher of (a) ITC reduced by 5% per quarter (or part) from the date of invoice, or (b) tax on the transaction value (Section 18(6) read with Rule 44/40). This prevents recovery of credit on assets sold cheaply after use.