Can ITC be claimed on capital goods?

Input Tax Credit (ITC) on capital goods is a critical aspect under the Indian Goods and Services Tax (GST) framework. The provisions related to ITC on capital goods, relevant acts, and landmark cases can be outlined as follows:

1. Relevant Provisions under GST Law

The provisions related to ITC on capital goods are primarily found in the Central Goods and Services Tax Act, 2017 (CGST Act):

• Section 16: Entitlement to Input Tax Credit
  • This section states that every registered person is entitled to take credit for input tax charged on any supply of goods or services used or intended to be used in the course of business.
  • ITC can be claimed on capital goods provided they are used for business purposes and are not blocked under Section 17(5).
• Section 17(1) & 17(2): Apportionment of Credit
  • ITC can be claimed proportionally for goods/services used for both business and non-business purposes.
  • For capital goods used partially for exempt supplies, the ITC claim is restricted.
• Section 17(5): Blocked Credits
  • It provides exceptions where ITC is not available, such as certain motor vehicles and goods used for personal consumption.

2. Definition of Capital Goods

• As per Section 2(19) of the CGST Act, “capital goods” refers to goods whose value is capitalized in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.

3. Key Rules for ITC on Capital Goods

• Rule 43 of the CGST Rules, 2017: This rule provides the manner of determination of ITC in respect of capital goods used for partly taxable and partly exempt supplies. It lays down how the ITC is to be calculated over the life of the capital goods.

4. Important Case Laws on ITC and Capital Goods

Several landmark cases have provided clarity on ITC and its application to capital goods:

• Commissioner of Central Excise v. Rajasthan Spinning & Weaving Mills Ltd. (2007):
  • In this case under the pre-GST regime (CENVAT Credit Rules), the Supreme Court held that credit can be availed for capital goods if they are used in the manufacturing process. This case has been cited under GST to emphasize the application of capital goods in furtherance of business as eligible for ITC.
• Essar Steel India Ltd. v. State of Gujarat (2017):
  • Although primarily under the VAT regime, this case clarified the interpretation of “input” and “capital goods,” indicating that the purpose of goods in the business impacts their eligibility for tax credit. This interpretation has influenced the GST perspective on ITC claims.
• Jaypee Bela Plant v. Commissioner of Central Excise (2011):
  • This case discussed the apportionment of credit on capital goods and how they should be considered for both taxable and exempt supplies, influencing Rule 43 under GST.

5. Legal Basis in the Constitution of India

While the GST framework and acts are part of statutory laws, their constitutional foundation stems from:

• Article 246A: Special provision empowering both Parliament and state legislatures to make laws with respect to GST.
• Article 265: States that no tax shall be levied or collected except by the authority of law, thereby giving legal backing to tax statutes such as the CGST Act.
• 101st Constitutional Amendment Act, 2016: Introduced to implement GST in India, providing a comprehensive structure for tax distribution between the Centre and states.

Conclusion

Under the Indian GST law, ITC on capital goods can be claimed provided the conditions in the CGST Act and associated rules are met. These provisions aim to facilitate seamless tax credit and prevent cascading taxation. Various court decisions have further defined and refined these provisions, reinforcing the business-oriented nature of the ITC system.