MAY 01, 2018

By V Vishwa, Chartered Accountant

SCOPE of Rule 43(1): -

Material clause under discussion is clause (c) of sub-rule (1) of Rule 43, reproduced below for reference:

(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 five years from the date of the invoice for such goods:

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;

Explanation: An item of capital goods declared under clause (a) on its receipt shall not attract the provisions of sub-section (4) of section 18, if it is subsequently covered under this clause.

In order to understand the issue, it will be beneficial to tabulate the scope of each clause in Rule 43(1):

Proviso covers movement from clause (a) to clause (c): -

Capital goods which on receipt falls under clause (a) i.e. used (for brevity henceforth used covers 'intended to be used' also) exclusively for non-business purpose or used exclusively for effecting exempt supplies is subsequently covered under clause (c) i.e. common capital goods used for taxable supplies (including zero rated supplies) as well as exempt supplies/non-business purpose, then value of common capital goods is to be arrived as per proviso to Rule 43(1)(c) after reducing the input tax at the rate of 5% for every quarter or part thereof.

Scope of explanation:

Explanation states that capital goods declared under clause (a), if it gets covered subsequently under clause (c), then the same will not attract the provisions of section 18(4) of CGST Act, 2017.

To understand this, we need to refer to section 18(4) – reproduced below:

(4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods , reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption: Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.

Section 18 (4) talks about a situation where a person deals with taxable supplies and avails input tax credit and subsequently:

-  opts to pay tax under composition scheme or

-  deals with supplies which are wholly exempt,

such registered person has to surrender the input tax on capital goods [discussion is confined to capital goods, while section deals with reversal for input also] determined as per Rule 44 of C.G.&S.T. Rules, 2017

Hence, section 18(4) covers a situation where registered person ceases to take input tax credit; whereas proviso to Rule 43(1)(c) deals a situation where:

-  capital goods exclusively used for exempt supply becomes a common capital goods or

-  capital goods exclusively used for non-business purpose is now also used for taxable supplies

requiring inclusion of such common capital goods into input tax credit mechanism.

As section 18(4) deals with exit from ITC and Rule 43(1)(c) deals with addition of the item into ITC , it is apparent that explanation never intended to refer section 18(4). In any case, section 18(4) was not attracted to the circumstances covered by Rule 43(1)(c), therefore need to state 'it is not attracted' through an explanation never arose.

If that was not the intended reference, what did explanation intend to actually refer?

Intent of Explanation:

We should have a situation where capital goods on receipt was exclusively used for effecting exempt supply; and it becomes subsequently includible in input tax credit scheme due to change.

When one traces such situation across the entire provisions of Chapter V of CGST Act, 2017 on Input Tax Credit, it can be seen that such situation is covered vide section 18(1)(d).

To appreciate this, it will be beneficial to refer to the provisions of section 18(1)(d)

(d) where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable: Provided that the credit on capital goods shall be reduced by such percentage points as may be prescribed.

Section 18(1)(d) deals with a case of capital goods on receipt exclusively used for exempt supply and subsequently becomes usable for effecting taxable supply – a situation of entry into ITC.

It deals with case of clause (a) – exclusively used for exempt supplies. On exempt supply subsequently becoming taxable, there are two scenarios:

-  Scenario – I: it can fall under clause (c) – common capital goods. (or)

-  Scenario – II: it can fall under clause (b) exclusively use for taxable supplies (including zero rated supplies) or

Section 18(1)(d) enables ITC for both the scenarios, credit will be determined as per Rule 40 of C.G. & S.T. Rules 2017. As scenario-I is specifically covered by proviso to Rule 43(1)(c), through an explanation, it was intended to confine the scope of section 18(1)(d) to scenario-II alone.

Therefore, explanation intended to state that section 18(1)(d) is not attracted in case of scenario –I when there is movement from clause (a) i.e. exclusively used for exempt supplies to clause (c) i.e. common capital goods.

Explanation intended to clarify the position as under: -

Instead of referring section 18 (1) (d) , it has been mentioned in the explanation that provision of section 18 (4) shall not be attracted.

Conclusion:

In view of above, explanation should be amended as under:

Explanation: An item of capital goods declared under clause (a) on its receipt shall not attract the provisions of clause (d) of sub-section (1) of section 18, if it is subsequently covered under this clause.

This is to ensure that registered person covered under section 18(1)(d) falling under scenario-I follows Rule 43(1)(c) and reverses the credit attributable to exempt supplies, as against availing credit in full, based on Rule 40.

(The views expressed are strictly personal)