ITC on Capital Goods Under GST

Input tax credit on a machine, a server rack or a delivery truck works like credit on anything else you buy, with three differences that catch businesses out: you cannot also depreciate the tax, you must share the credit out if the asset serves exempt supplies too, and you pay part of it back if you sell the asset, switch schemes or stop making taxable supplies within five years.

What counts as a capital good

Section 2(19) of the CGST Act defines capital goods as goods whose value is capitalised in the books of account of the person claiming the credit, and which are used or intended to be used in the course or furtherance of business. There is no list and no value threshold. The test is your own accounting treatment.

A ₹40,000 laptop that you capitalise is a capital good. The same laptop written off to expenses is an input. The difference matters because the reversal rules below apply only to capital goods, and because the annual return (GSTR-9) reports the two separately.

Services are never capital goods, even when you capitalise them. Installation, commissioning and consultancy fees on a new plant are input services for GST, although you may add them to the asset's cost in your books.

Full credit in one go, on the normal conditions

Under the old central excise CENVAT scheme, a manufacturer could take only 50% of the duty on capital goods in the year of receipt and the balance in a later year. GST dropped that split. If the asset is used for taxable supplies, the whole credit is available in the return for the period you receive it.

Everything else in Section 16 still applies, as covered in input tax credit rules explained:

• You hold a tax invoice, the supplier has reported it so it appears in your GSTR-2B, and the supplier has paid the tax.
• You have received the goods. Where a machine arrives in lots or instalments against one invoice, the credit is available when the last lot arrives.
• You pay the supplier within 180 days of the invoice date, or reverse the credit until you do.
• You claim it before the Section 16(4) cut-off, which is 30 November after the end of the financial year or the annual return date if that comes first. See the ITC time limit under Section 16.

The credit then sits in your electronic credit ledger like any other ITC and is used against output tax in the same order of set-off. The mechanics are in electronic credit and cash ledger.

Before paying a large machinery invoice, check that the supplier's GSTIN is active and filing returns, because your credit depends on the supplier reporting the invoice. You can check five GSTINs a day free at GST number search without signing up.

What Section 17(5) still blocks

Capitalising an asset does not unblock credit that Section 17(5) denies. The two blocks that most often touch capital expenditure:

• Motor vehicles for transporting persons with approved seating of up to 13 including the driver, unless used for further supply of such vehicles, passenger transport or driving training. Goods carriages are not blocked.
• Construction of immovable property: works contract services, and goods or services used to construct immovable property on your own account, are blocked even when capitalised. The exception is "plant and machinery", which the Act defines to exclude land, buildings, civil structures, telecommunication towers and pipelines laid outside the factory premises.

So credit on a machine and its foundation is allowed, while credit on the factory shed that houses it is not. The full list is in blocked credits under Section 17(5).

The depreciation trap in Section 16(3)

Section 16(3) says that where you have claimed depreciation on the tax component of the cost of capital goods or plant and machinery under the Income-tax Act, input tax credit on that tax component is not allowed.

In practice this is a choice made when the asset is booked. Take the credit and capitalise only the value net of GST. Or capitalise the GST as part of the asset's cost and depreciate it. You cannot do both. Where credit is blocked anyway, say on a passenger car, capitalising the tax and depreciating it is the correct treatment.

Common-use capital goods and Rule 43

Rule 43 of the CGST Rules decides how much credit you keep on an asset that serves more than one purpose. It sorts capital goods into three groups:

• Used only for non-business purposes or only for exempt supplies: no credit. It is not credited to the ledger at all.
• Used only for taxable supplies (including zero-rated supplies): full credit, credited to the electronic credit ledger.
• Used for both taxable and exempt supplies ("common credit"): the whole credit is credited to the ledger, and the exempt share is then reversed over the asset's life.

For the third group, Rule 43 takes the useful life of every capital good as five years from the invoice date. The credit on each asset is spread across 60 months, so each month carries one-sixtieth of it. The part of that monthly amount attributable to exempt supplies is worked out as the ratio of exempt turnover to total turnover for the period. That share is added to your output tax liability.

Suppose a common-use machine carries ₹6,00,000 of credit. One-sixtieth is ₹10,000 a month. If exempt supplies are 20% of turnover in a month, ₹2,000 is added to that month's liability. The reversal runs through GSTR-3B each period for as long as the asset remains within its 60 months.

If a capital good bought for exempt supplies only, on which no credit was taken, later comes into common use, Rule 43 lets you bring the credit in, reduced by 5 percentage points for every quarter or part of a quarter since the invoice date.

Selling or removing a capital good: Section 18(6)

When you supply capital goods or plant and machinery on which you took credit, Section 18(6) requires you to pay the higher of:

1. the input tax credit you took on the asset, reduced by the percentage points prescribed, or
2. the tax on the transaction value of the sale.

Rule 44(6) sets the reduction at 5 percentage points for every quarter or part of a quarter from the date of the purchase invoice. After 20 quarters the reduced credit is zero, so an asset sold more than five years after purchase just attracts ordinary tax on its sale price. The proviso to Section 18(6) carves out refractory bricks, moulds and dies, jigs and fixtures supplied as scrap: for those you pay tax on the transaction value.

A worked example

You buy a CNC machine on an invoice dated 10 June 2024 and take ₹1,80,000 of credit. You sell it on 20 January 2026.

1. Count quarters from the invoice date. 10 June 2024 to 20 January 2026 is six full quarters and part of a seventh. A part quarter counts as a whole one, so that is 7 quarters.
2. Reduce the credit. 7 quarters × 5 points = 35 percentage points. The retained portion is 100% − 35% = 65%.
3. Amount (a). ₹1,80,000 × 65% = ₹1,17,000.
4. Amount (b). Tax on the sale price. If you sell for a price on which tax works out to ₹90,000, amount (b) is ₹90,000.
5. Pay the higher. ₹1,17,000.

Had the same machine fetched a price carrying ₹1,30,000 of tax, you would pay ₹1,30,000, ordinary tax on the invoice. The quarters rule bites only when an asset is sold early or cheaply, and the gap between the tax on your invoice and amount (a) is a cost you bear yourself.

Composition, exemption, cancellation and job work

The same 5-points-per-quarter reduction applies whenever you stop being entitled to credit on an asset without selling it.

Switching to composition or to wholly exempt supplies. Section 18(4) requires you to pay an amount equal to the credit on inputs in stock, semi-finished and finished goods, and on capital goods. For capital goods, Rule 44 reduces that credit by 5 percentage points per quarter or part since the invoice date. The details are reported in Form ITC-03, which Rule 44(4) requires within 60 days of opting for composition or of the supplies becoming exempt. The limits and conditions for opting in are in the composition scheme guide.

Moving the other way. Section 18(1) lets a composition taxpayer who becomes a regular taxpayer, or a business whose exempt supply becomes taxable, take credit on capital goods on hand, reduced by the same 5 points per quarter under Rule 40, through Form ITC-01. A new registrant, by contrast, can take credit only on inputs in stock, not on capital goods already owned.

Cancellation. Under Section 29(5), a business whose registration is cancelled pays back credit on capital goods on hand, computed the same way or as tax on their transaction value if that is higher, through the final return. If a change of constitution means a new GSTIN, the transfer of credit is a separate process; see GSTIN changes on a change of constitution.

Job work. Section 19 lets you take credit on capital goods sent to a job worker, and even on capital goods delivered straight from your supplier to the job worker's premises. Capital goods must come back, or be supplied onward from the job worker's premises, within three years of being sent. If not, the original dispatch is deemed a supply on the day it left, and tax is payable with interest. Moulds and dies, jigs and fixtures and tools are outside that time limit. Movement is reported in Form ITC-04, and inter-state movement to a job worker needs an e-way bill whatever its value, as explained in e-way bills for job work.

Scenarios at a glance

Rates of GST on machinery were among those rationalised in September 2025, so check the rate on your specific item on CBIC's rate finder at cbic-gst.gov.in rather than relying on an older invoice.

Frequently asked questions