Services on capital account whether input services or capital goods

[Sanjay Kumar]

Under the GST Act, "services" have been defined as anything other than "goods." Further, "capital goods" are defined as goods the value of which is capitalized in the books of accounts and which are used or intended to be used in the course or furtherance of business.

In many instances, businesses procure certain services—such as architectural fees, design and engineering services, license fees, etc.—which are directly attributable to the creation or installation of plant and machinery. These service-related costs are often capitalized along with the value of the plant and machinery in the books of accounts.

The issue arises regarding the treatment of such capitalized services for the purpose of Input Tax Credit (ITC) availment or reversal. Specifically:

1. Whether such services, though capitalized as part of plant and machinery, should be treated as 'input services' or as 'capital goods' under the GST framework; and
2. Accordingly, whether ITC on such services should be subject to reversal under Rule 42 (applicable to input and input services) or under Rule 43 (applicable to capital goods).

Additionally, Para 6(a) of Schedule II to the CGST Act deems works contracts as a supply of services. In cases where a Lump Sum Turnkey (LSTK) contract is awarded—for example, for the construction of a large industrial plant—the entire scope of the contract (inclusive of both goods and services) is considered as a works contract service.

In such cases, the entire value of the LSTK contract is capitalized as part of the plant and machinery. The clarification sought is:

3. Whether ITC on such LSTK contracts, being deemed as works contract services and capitalized in the books, should be treated as input services or capital goods for the purpose of ITC availment and reversal under Rules 42 and 43 of the CGST Rules.

AI Summary

Classification of capitalized services as input services alters ITC reversal treatment under GST rules for works contract supplies.
Services capitalised with plant and machinery retain their character as services under GST and should be treated as input services rather than capital goods for ITC purposes. LSTK or works contract supplies, even when capitalised, are likewise services; ITC on these supplies is subject to reversal under the provisions governing inputs and input services. Classification impacts timing, calculation and compliance for ITC reversal and may require legal or administrative clarification where the plant-versus-immovable distinction is ambiguous.