Treatment of ITC on Power Plant on Discontinuation of Taxable Manufacturing Activity

[TEAM GST]

The Registered Taxable Person (RTP) is engaged in making both taxable and exempt supplies.

The RTP has availed Input Tax Credit (ITC) on the procurement of capital goods and the installation of a power plant, which was originally established primarily for captive consumption of electricity in the manufacturing of taxable supplies. However, a small quantity of the electricity generated by the power plant is also sold to an outside agency, such supply being exempt under GST.

The ITC availed on the procurement and installation of the power plant has been utilized by the RTP. Further, since the RTP is engaged in both taxable and exempt supplies, it has been duly complying with Section 17(2) of the CGST Act, 2017, and has been making the requisite reversal of ITC attributable to exempt supplies in accordance with Rule 43 of the CGST Rules, 2017. Rule 43 specifically provides for attribution of ITC relating to capital goods used partly for taxable supplies and partly for exempt supplies.

The issue arises where, subsequently, the RTP decides to discontinue/sell the manufacturing unit producing taxable supplies, while retaining the power plant as a standalone asset and continuing to generate and sell electricity, which is an exempt supply under GST.

How to treat the ITC availed and utilized on the procurement / installation of capital goods for Power plant?

AI Summary

Input tax credit on power plants requires residual reversal when common capital goods become exclusively used for exempt supplies.
Where a power plant previously used for taxable manufacturing and exempt electricity sales becomes exclusively used for exempt electricity generation, ITC attributable to its remaining 60-month useful-life period should be reversed. The residual reversal should account for ITC reversals already made while the plant was used commonly for taxable and exempt supplies. A capital-goods-wise 60-month reconciliation is suggested. Full reversal of the original ITC is not suggested solely because of the subsequent change in use, subject to verification of applicable amendments, notifications and judicial precedent.