GST input tax credit apportionment under Rules 42 and 43 for capital goods and input services used in taxable and exempt supplies

Input tax credit on capital goods used first for taxable supplies and later for both taxable and exempt supplies must be apportioned under Rule 43 over the useful life from the date of invoice, with the balance credit reversed to the extent attributable to exempt supplies. For input services, common credit under Rule 42 is computed by reference to exempt supplies in the relevant tax period; where exempt production had not commenced, the exempt value was nil and no reversal was required for that year, subject to year-end adjustment under Rule 42(2).

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Issues: (i) Whether input tax credit on capital goods used for taxable supplies and subsequently for both taxable and exempt supplies was to be computed over the useful life from the date of invoice with reversal of the balance amount. (ii) Whether the entire input tax on input services was admissible during the year in which exempt production had not commenced.

Issue (i): Whether input tax credit on capital goods used for taxable supplies and subsequently for both taxable and exempt supplies was to be computed over the useful life from the date of invoice with reversal of the balance amount.

Analysis: The statutory scheme for capital goods credit under Rule 43 requires credit to be taken on receipt and then apportioned over the balance period of the useful life, which is sixty months from the date of invoice. Where capital goods initially support only taxable production and later come to be used for both taxable and exempt supplies, the proviso to Rule 43(1)(d) and clauses (e), (f) and (g) govern the allocation. The balance credit already availed has to be carried into the common corpus and reversed to the extent attributable to exempt supplies over the remaining useful life.

Conclusion: The credit on such capital goods must be computed over the useful life from the date of invoice, and the balance amount already credited must be reversed in accordance with Rule 43.

Issue (ii): Whether the entire input tax on input services was admissible during the year in which exempt production had not commenced.

Analysis: Under Rule 42, common credit attributable to exempt supplies is determined by the prescribed formula with reference to the value of exempt supplies in the relevant tax period. Since exempt production had not commenced during the year in question, the value attributable to exempt supplies was nil for those tax periods. On that basis, no part of the common credit on input services was required to be reversed for that year, subject to the year-end adjustment mechanism under Rule 42(2).

Conclusion: The entire input tax on input services was admissible during that year, subject to the year-end adjustment under Rule 42(2).

Final Conclusion: The ruling adopted the statutory apportionment mechanism for capital goods while permitting full input tax credit on input services for the period before exempt production commenced, thereby granting only partial relief to the applicant.

Ratio Decidendi: Input tax credit on capital goods and input services used for both taxable and exempt supplies must be apportioned strictly under the prescribed GST formulae, and where exempt supplies have not yet commenced, the exempt portion for that period is nil for common credit on input services.

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