Implication of recent GST Amendment on Capital Goods

 India is on the verge of completion of three years since the enactment of GST law, but the industry is still facing challenges in sheer implementation of GST law. The Indian Government is leaving no stone unturned to overcome the flaws and issues persisting in the GST law by way of amendments, order and clarifications on regular basis.

 

Input Tax Credit ("ITC") is an important concept under the GST law which enables a person to avail the credit of tax paid on purchase of goods which are used in the course of business. Also, in numerous judicial pronouncements, credit has been held to be the vested right of the taxpayer. GST law provides the liberty to every registered person to avail the whole of ITC on the capital goods at once as in contrast to the earlier Central Excise law.

 

However, GST law provides for reversal of ITC on capital goods which are not used for effecting taxable supplies or are used for making non-business supplies. R ule 43 of the CGST Rules prescribes the mechanism for reversal of ITC in respect of capital goods which are commonly used for effecting taxable supply and exempt supply (including non-business purpose)

 

Recently, the above rule has been amended with an objective to plug out the inadvertent error persisting in the mechanism for reversal of ITC pertaining to common capital goods, and such amendments forms the bedrock for our article.

 

M ANNER OF REVERSAL OF ITC AND IMPLICATION OF AMENDMENT THEREON

Let us proceed to analyse the impact of amendment on different scenarios and whether the Government has been successful in addressing all the issues present in the mechanism.

 

Scenario 1: Capital Goods initially used for effecting exempt supply & are later-on used for effecting both taxable and exempt supply

 

R ule 43, before the recent amendment, provided the mechanism for computing the ITC reversal

 

amount after reduction of ITC at the rate of five percentage points for every quarter  or part

thereof for the period capital good was used for effecting exempt supply from the gross ITC amount reflected on the invoice. Such reduced ITC was then required to be divided by entire useful life (in months) in order to derive the ITC pertaining to a particular tax period.

 

This leads to certain absurdity in terms of calculating the amount of reversal for a tax period which resulted in revenue leakage.

In order to curb the revenue leakage, the Government has brought out the amendment in             RRule used for effecting exempt supply shall be added to the output tax liability instead of reducing it from gross ITC. Also, the entire ITC amount reflected on the invoice is required to be availed in the electronic credit ledger ("ECL") in the month in which ITC amount has been added to output tax liability and ITC pertaining to particular period is to be arrived by dividing the gross ITC with useful life.

 

Above mechanism can be understood with the help of following example:

Capital Good Q purchased on 20 December 2018, has been exclusively used for effecting the exempt supplies till 31 July 2019. However, from 01 August 2019, such capital good was used for effecting both exempt and taxable supply. ITC on such capital goods amounts INR 60,000.

 

(Amounts in INR)

Particulars	Before Amendment	After Amendment	Remarks
Step 1: ITC to be availed on 20 Dec 2018	Nil	Nil	As capital good was to be used exclusively for effecting exempt supply till 31 July 2019
Step 2: ITC to be availed on 1st Aug 2019	48,000	60,000	Before amendment ITC amount derived by reducing ITC @ 5% for every quarter or part there off upto 31 July from the   gross ITC (i.e. 60,000- 12,000   )   After amendment Entire ITC amount reflected on the invoice is to be availed
Step 3: ITC amount to be added to output tax liability	-	12,000	It is derived by multiplying ITC amount reflected on the invoice with 5% for every quarter or part there off upto 31 July
Step 4: ITC amount pertaining to a tax period	800	1000	Arrived by dividing the ITC availed with useful life (60 months)
Step 4: ITC to be reversed in every tax period	320	400	Considering the exempt turnover ratio as 40%

 

- Considering the above example, it can be observed that, before amendment, INR 800 was attributable to the particular tax period which further results in short reversal of ITC. This leads to certain absurdity in the mechanism as the ITC pertaining to each tax period should be INR 1,000 as the gross ITC should be evenly distributed over the entire useful life.

- Now, as per the amended provision, ITC pertaining to the tax period is INR 1,000 leading to calculating the ITC reversal amount as INR 400 which is also apt logically.

 

This clearly demonstrates that Government has brought out the amendment in Rule 43 with the objective to obviate the short reversal of ITC.

 

Now, moving on to second scenario which is being dealt in the rules is as follows.

 

Scenario 2: Capital Goods initially used for effecting taxable supplies & are later on used for effecting both taxable and exempt supply

 

Akin to the previous scenario, in such a case also Rule 43 , before amendment provides for reduction of ITC attributable to the period when capital good was exclusively used for rendering the taxable supply, from the total amount of ITC mentioned on the invoice for deriving the value of common credit which is to be reversed in a tax period basis the exempt turnover ratio.

 

This provision was also leading to the short reversal of ITC similar to the situation discussed in previous scenario, consequently, Government parallelly brought the like amendment for above mentioned scenario and has done away with the requirement of reduction of ITC from gross ITC amount to derive the common credit. Hence, the ITC for a particular tax period is required to be computed by taking the entire amount reflected on the invoice.

 

Thus, the above-mentioned amendment has also been done with the view to pull out the flaw in the above rule.

 

I SSUES PERSISTING IN RULE 43 AFTER THE AMENDMENT

Though the government has brought the amendment for plugging out the loop holes present in erstwhile R ule 43, however certain issues are still left un-addressed, such as:

 

o Increased Tax Burden

On careful perusal of the above illustrated mechanism, it can be seen that R ule 43 provides that ITC amount to be added to the output tax liability shall be computed at the rate of five percentage point for e very quarter or part thereof. The term "part thereof" is to be considered as complete quarter and hence, ITC amount to be added to output tax liability shall be computed by considering the entire quarter even if such capital good was used only for a single day in that particular quarter. Thus, this leads to excess computation of ITC amount which needs to be added to output tax liability leading to excess tax burden for the tax payers.

Alternatively, it can also be said that when ITC reversal amount in calculated on

monthly basis, the amount to be added to output tax liability shall also be calculated monthly.

 

o Applicability - Prospective or Retrospective

Also, there is lack of clarity whether amended provision would be applicable on capital goods procured post amendment or it would also be made applicable to the capital goods existing on the date of amendment. In other words, whether the calculation needs to be reworked right

from the date of the purchase of capital good in case of capital goods existing on the date of amendment. Thus, whether the tax payer is required to follow both types of mechanism for calculating the reversal amount for existing and newly purchased capital goods.

 

o Disclosure issue in Form GSTR-3B

Another important aspect which has been dealt in the amended rule is that there is no provision/ column in the format of Form GSTR-3B for reporting the addition in the output tax liability as mentioned.

 

Table 3.1 & 3.2 of Form GSTR-3B deals with reporting of outward supplies made to registered person, unregistered persons etc. along with corresponding taxes. There is no column to report the output tax as prescribed under this rule. Also, it would not be appropriate to disclose such output tax in ITC reversal column.

 

o Term "Tr" left undefined

Amendment in Rule 43 has deleted the Clause (f) of erstwhile R ule 43 which defined the term "Tr" as an aggregate of "Tm" for all the capital goods whose useful life remains during the tax period. The term "Tr" is used in the formula for calculating the amount of common credit attributable towards exempt supplies.

 

The deletion of such clause has rendered the formula incomplete, as meaning to the term "Tr" has not been defined in the amended Rule. Though, such omission can be considered as a drafting error, the same needs to be rectified.

 

o Unwarranted interest while reversal of ITC

Rule 43 provides the mechanism, firstly, to avail the entire credit pertaining to capital goods used for effecting both exempt and taxable supply and then reversal of monthly ITC attributable to the exempt supply. This mechanism also stipulates for payment of interest at the time of reversal of credit. Now, the payment of interest leads to additional financial burden on the taxpayers even if availment and reversal of credit is being done in accordance with provision of law. Further, the assessee cannot opt to take ITC on Capital goods in instalments to avoid any interest liability as the same may become time barred.

 

o Availment of ITC - Whether hit by limitation

Lastly, R ule 43 talks about of availment of entire of ITC reflected on the invoice on capital goods initially used for effecting exempt supply and are subsequently used for effecting both exempt and taxable supply, the issue for consideration arises whether such availment would be hit by the restriction on availment of ITC after the due date of furnishing of the return under s ection 39 for the month of September following the end of financial year to which such invoice pertains or furnishing of the relevant annual return, whichever is earlier.

 

Therefore, at the end it can be concluded that this amendment still left unattended certain issues in the provision rendering the situation under Rule 43 unsettled.