MAY 25, 2018

By Padmasri Manyam

THIS article is penned down to highlight the ambiguities regarding the reversal of input tax credit (ITC) on capital goods under the GST Law.

As we all are aware, under the earlier law, full Cenvat credit on capital goods was allowed even if such capital goods were used partly for taxable and partly for exempted goods or services. There was no restriction in availing Cenvat credit on capital goods, unless they were exclusively used for exempted goods or services.

Whereas under GST Law, the capital goods when used partly for effecting taxable supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies as per Section 17(2) of Central Goods and Service Tax Ac, 2017 (CGST Act).

Further, as per Section 16(3) of CGST Act, where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the ITC on the said component shall not be allowed, which is similar to the provisions of earlier law.

Mechanism for reversal of ITC on capital goods under GST Law:

Rule 43 of CGST Rules, 2017 prescribes the manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.

The said Rule provides that the amount of ITC in respect of capital goods used or intended to be used exclusively for effecting exempt supplies shall not be credited to the electronic credit ledger. Therefore, in such cases, the taxable person can opt to claim depreciation on the portion of ITC, under Income-tax Act.

The amount of ITC in respect of capital goods used or intended to be used exclusively for effecting taxable supplies shall be credited to the electronic credit ledger.By virtue of restrictions provided under Section 16(3) of CGST Act, having availed ITC on such capital goods, the taxable person cannot claim depreciation on the portion of ITC, under Income-tax Act.

In case where the capital goods are used partly for effecting taxable supplies and partly for effecting exempt supplies, the amount of full ITC shall be credited to the electronic credit ledger and the useful life of such capital goods shall be taken as five years (60 tax periods) from the date of invoice of such goods. Subsequently, as per the formula prescribed under Rule 43 of CGST Rules, the amount of ITC must be reversed to the extent of exempt supplies over a period of five years.

One question which may arise is, whether the reversal of ITC on such capital goods has to be done on monthly basis or annually?

As per the aforesaid rule, the reversal of ITC on capital goods must be done for every tax period i.e. every calendar month over a period of five years.

Impact of the expression 'from the date of tax invoice' used in the aforesaid Rule:

Since the useful life of capital goods is deemed as five years from the date of invoice of such capital goods, the taxable person must keep track of all the capital goods over period of five years from the date of invoice for calculation of amount of ITC to be reversed, which is practically a cumbersome task.

Further, in case where a taxable person has availed the credit on capital goods after one year from the date of invoice (considering that the time limit specified under Section 16(4) has not been expired), the useful life of the capital goods starts from the date of invoice whereas the date of availment of credit can be much later.

To ascertain the amount of ITC to be reversed on all common capital goods in any given tax period, two factors are relevant as per the formula:

i) The amount of ITC at the beginning of a tax period and

ii) The useful life which remains during the tax period.

To explain the issue, let us take a case where the credit is not availed in the month of its acquisition i.e. date of invoice (due to various practical reasons such as the timing difference between the date of invoice and the receipt of capital goods, taking ITC based on payment of consideration to the supplier etc.,) and the same has been availed later, the ITC will not be available at beginning of the such tax period. Hence, no ITC reversal is possible for the period from the date of invoice to the date of availment of credit, though the useful life of the capital goods has commenced from the date of tax invoice.

Illustrative example is outlined below for better understanding:

The Rule can be amended to substitute the expression 'from the date of invoice' with 'from the date of availment of credit' to bring uniformity in both the scenarios above.

The said amendment can also enable the taxable person to track the useful life of capital goods from the date of availment of credit i.e. on a monthly basis instead of each invoice. However, the taxable person would still have to keep track of capital goods by over a period of five years.

Interest on the amount of ITC to be reversed on common capital goods :

As per Rule 43((1)(h) of CGST Rules, the amount of ITC reversed shall be added back to the output tax liability in the respective tax period along with the applicable interest during every tax period of the useful life of the concerned capital goods (i.e. five years),

The applicable interest rate or the mechanism to calculate applicable interest has not been prescribed under Rule 43.

Whether interest is really payable?

As per the provisions of GST Laws, the taxable person is entitled to take full input tax credit at the time of receipt of capital goods unless it is covered under blocked credits or exclusively used for exempt supplies. In case where the capital goods are commonly used, the ITC has to be reversed/ paid to the government to the extent of exempted supplies.

The taxable person has to pay the amount of ITC reversed along with applicable interest as per the said Rule. It is pertinent to note that from the plain reading of the interest provisions of law, the interest liability is triggered from the date of availment of credit irrespective of whether the credit is utilised or not.

When the taxable person is complying with the provisions of law and the amount of ITC reversed over a period of useful life of capital goods is paid to the Government, imposing a cost in the guise of "interest" from the date of availment of ITC is unwarranted. Hence, in the view of the author, there should not be any interest liability on the amount of ITC reversed on capital goods and paid to the government based on the manner prescribed under the said Rule.

Even if we assume that there is interest liability on the reversal of ITC on common capital goods, in case where the taxable person has taken credit but not utilised (i.e. no revenue loss to the Government) shall not attract interest liability at the time of reversal.

Notwithstanding the above view, let us examine the rate of interest applicable and the manner of computation of interest, in view of the existing GST provisions.

As per the Section 50(1) read with Notification No. 13/2017-Central Tax dated 28th June 2017 (F.No.349/72/2017-TRU), every person who is liable to pay tax in accordance with the provisions of GST Act or the Rules, but fails to pay the tax, shall be liable to pay interest at the rate of 18%.

In the present case, the amount of ITC reversed shall be added back to the output tax liability which can result in failure to pay tax. Therefore, the interest specified under Section 50(1) of CGST Act can get triggered and accordingly, the applicable interest rate could be 18%.

The inference can be also made to Rule 37 of CGST Rules, wherein it has been prescribed that the registered person shall be liable to pay interest specified under Section 50(1) from the date of availing credit till the date when the amount added to the output tax liability is paid. Considering the interest rate as 18%, the approximate interest liability over a period of five years (i.e. useful life of capital goods) would approximately work out to 44% of the amount of ITC to be reversed.

Conclusion:

The taxable persons are facing genuine hardships in terms of reversal of credit on capital goods along with the interest liability due to various reasons explained above (useful life from the date of invoice resulting in tracking capital goods at invoice level, lack of mechanism to calculate interest liability under the said Rule, default interest from the date of availment to the date of reversal of ITC etc).

Hopefully, the CBIC would redress the issue at the earliest.

(The author is Associate, Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal.)