TREATMENT OF CAPITAL GOODS AND TAX THEREON

1. What are capital Goods?
   
   Generally speaking, Capital Goods are those that are used in relation to manufacturing or processing or trading activities. However, there is as yet no uniformity in the definitions in the State VAT Acts, with some states defining Capital Goods as per the Income Tax Act and others defining them as Plant, Machinery or equipment used for manufacturing. Thus it is not clear if furniture and fixtures, Computers and other capital assets that are not directly used for manufacturing, but nevertheless used in relation to manufacturing come under the definition of Capital Goods.
   
   
2. Are Capital Goods entitled for Input tax credit?
   
   The White paper categorically states that input tax paid on Capital goods can be set off over 36 months on a equated basis. However the duration and quantum differs from State to State.
   
   
3. Is input tax embedded on Capital goods lying in stock as on 31.3.05 eligible for set off?
   
   There is no uniformity on this as well. Some states have clearly allowed input tax credit subject to certain conditions, while others have not dealt with the issue.

STATE-WISE ANALYSIS

WHITE PAPER

7. Input tax credit on capital goods will also be available for traders and manufacturers. Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly instalments. The States may at their option reduce this number of instalments. There will be a negative list for capital goods (on the basis of principles already decided by the Empowered Committee) not eligible for input tax credit.

DELHI [SEC 2(F), 9, 14(3) ]

• As per Sec 2(f) Capital goods means plant, machinery and equipments used in the process of manufacturing.
  

• 1/3rd of input tax on capital goods is allowed in the tax period of purchase and the balance allowed in 2 equal annual instalments.
  

• Where the dealer sells such capital goods, the dealer shall be allowed as tax credit, the balance amount of the input tax, if any, in respect of such capital goods as has not been earlier availed as tax credit, such tax credit shall be allowed in the tax period in which such capital goods are sold and only after adjusting the output tax payable by him:
  

• Where the dealer transfers the capital goods otherwise than by way of sale to another State, any unavailed input tax shall be granted credit after reducing 4% thereon.
  

• Where the capital goods is sold not at fair market value, the credit already availed shall be reversed back in the year of such sale.
  

• No input credit on capital goods is permissible if it is used to produce exempt goods.
  

• Where depreciation has been claimed under the Income tax Act in respect of the input tax paid, such portion of the tax shall not be available as input tax credit.
  

• Input tax paid on capital goods lying in stock as on 31.3.05 is not entitled to credit.

MAHARASHTRA [ SEC 2(5), 48, 84, Rule 31]

• Capital asset" shall have the same meaning as assigned to it, from time to time, in the Income Tax Act, 1961, but the said expression shall not include jewellery held for personal use or property not connected with the business 
  

• "Input Taxes paid by an exporter is refundable within a period of 90days  from the date of filing the return for the period".
  

• For capital goods lying in stock as on 31.3.05, they should have been purchased after 1.4.03 and resold on or before 31.12.05. Set off is available only at the time of such sale.
  

• Tax paid under the Act for purchase of Capital goods is also available for set off against output tax payable.
  

• No input tax credit on purchase of capital assets by the claimant dealer is allowed where the dealer is principally engaged in doing job work or labour work and is not engaged in the business of manufacturing of goods for sale by him and incidental to the business of job work or labour work, any waste or scrap goods are obtained and are sold

WEST BENGAL [SEC 2(6), Rule 19]

• Consequent to the West Bengal Taxation Laws Amendment Ordinance 2005: 

1. "Capital goods" means such goods meant for use in the manufacture or for execution of works contract in West Bengal, and such other goods required by a reseller to keep the goods in saleable condition or to effect the sale properly in West Bengal"
   

2. components, spare parts and accessories of such machine, machinery, plant, equipment, apparatus, tools, appliances or electrical installation used for the purposes as stated in clause (a),
   

3. moulds and dies,
   

4. pollution control equipment,
   

5. refractory and refractory materials,
   

6. storage tank, and
   

7. tubes and pipes and fittings thereof, used for the purpose of manufacture of goods;

• Input tax on such capital goods can be taken credit as under:

• Input tax embedded in the Opening stock of Capital goods is not eligible for set off.

PUNJAB: [SEC 2, 14]

• Capital goods means any plant, machinery or equipment including equipment for pollution control, quality control, laboratory and cold storage, used in manufacturing, processing and packing of taxable goods for sale.
  

• Tax paid on capital goods lying in stock as on 31.3.05 can be considered for input tax credit only is the dealer is a reseller of such goods.
  

• Input tax on Capital goods purchased is entitled to tax credit and set off.

SUMMARY:

It may be noted that the definition of Capital Goods is not uniform, and though the White Paper allows the benefit of input credit for Traders, the definition in three states barring Maharashtra presupposes the usage of capital goods for manufacture. This is at significant variance with the White Paper. There is broad conformity with the provisions of the White Paper on the set off procedures. Input tax on Capital goods purchased on or after 1.4.05 is uniformly allowed in all 4 states as per the White Paper. But tax embedded on Capital goods lying in stock as on 31.3.05 is not allowed credit in Delhi and West Bengal. Further Maharashtra and Delhi has provided for special conditions as to when input tax is allowed.