GST Updates

Issues in GST: Denial of ITC on Capital Goods held as on date of registration: Part-3

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In this update, we would be discussing that law should not restrict availment of Credit of Input Tax in respect of capital goods held by a person as on effective date of registration. The case pertains to a very general situation wherein capital goods are purchased and are held by the person on the date of registration as new business is being set up or registration is taken within a period of 30 days from the date of becoming liable to be registered under the law.

CBEC has released revised Draft GST Law on 26th November 2016. The law is slated to be presented before Loksabha in the coming days. It’s not the final blueprint and is bound to change on the basis of suggestions received from various quarters. In this series of updates, we would be putting forth various issues in the Revised Draft GST Law which needs consideration. The basic theme is to spread awareness about such provisions so that they may be raised at various platforms and corrective provisions be incorporated in the law.

3.1          Section 18(1) of the Revised Draft GST Law provides that

“A person who has applied for registration under the Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall, subject to such conditions and restrictions as may be prescribed, 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 on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act.”

3.2          Thus the section provides Input Tax Credit “in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock. Further the credit would be limited to the stock lying “on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act”.

3.3          The definition of Inputs as contained under section 2(52) provides that

“(52) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;”

Thus, Input means any goods but does not include capital goods.

3.4          Therefore, if any person has got himself registered within 30 days of the date from which he becomes liable for registration; even then he would be able take credit of the Input Tax only in respect of the goods lying in stock but he would not be able take Credit of Input Tax in respect of Capital Goods.

3.5          This would tantamount to force the person to take registration in GST from the time when he intends or even thinks to start the business even though he is not liable to be registered under GST at that point of time. If he fails to obtain registration at that time and thinks that that he would take the registration once the business is set up then, although he would be allowed the credit of the Input Tax in respect of the goods lying in stock but whatever capital goods he has purchased till that date, he would not be allowed to avail Input Tax Credit in respect of the same.

3.6          This is the situation when a person has taken registration within 30 days of the date from which he becomes liable leave aside if he takes the registration after the statutory period of 30 days. In that case there is a complete denial of Input Tax Credit both in respect of stock and also for capital goods.

3.7          In case of capital intensive Industries, registration would have to be taken right at the time of commencement of set up of business and before any purchases have been made, otherwise any delay might result in a huge loss of Input Tax Credit paid on Purchase of Capital Goods. This would be a major setback for the business and should be reconsidered.

3.8          This would also put businesses obtaining registration within the statutory period of 30 days from the date of becoming liable for registration in a disadvantageous position as compared to businesses who have obtained registration even before any goods were purchased. Although in above cases, both the persons are within the statutory time limit but still one has the benefit of availment of Credit of Input Tax in respect of Capital Goods and the other one is denied the benefit of Credit of Input Tax in respect of Capital Goods. The law should not discriminate between the two as both are following the law.

3.9          Further, there should be no denial of credit of Input Tax on Capital Goods even in case the registration is taken beyond the statutory time limit of 30 days as by denying the benefit of credit of Input Tax on Capital Goods, law is trying to penalize the assessee on wrong end. A person should be penalized for late registration in form of penalty but not in the form of denying the Input Tax Credit.

3.10       Another view point is that wherein there is restriction on availment of Credit of Input Tax of after one year from the date of issue of tax invoice relating to such supply in case of new registration, then why there should be any restriction in case of availment of credit of input tax in respect of capital goods.

Comment: In case of new registration, there should not be any restriction on availment of Credit of Input Tax in respect Capital Goods lying as on the effective date of registration. Denial of Input Tax Credit would be negative both for Capital Intensive Industries and for other businesses as well as such denial would result in increase in the business cost.

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