Specific provisions within the Central Goods and Services Tax (CGST) Act, 2017, outline circumstances under which ITC claims may be restricted or disallowed through a SCN

The Goods and Services Tax ( GST ) regime in India aims to eliminate the cascading effect of taxes and promote a seamless flow of input tax credit ( ITC ). One might get a GST notice for availment of both Input Tax Credit under Goods and Services Tax Act, 2017 and Depreciation under Income Tax Act, 1961. Here is all you need to know to respond to such show cause notices. This article delves into the nuances of claiming ITC on capital goods while also availing depreciation under the Income Tax Act, 1961, and addresses concerns related to ITC on machinery classified as immovable property. Complete Draft Replies of GST ITC Related Notices, Click Here Claiming ITC and Depreciation on Capital Goods Section 16(3) of the CGST Act, 2017, states: “Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.” Interpretation This provision prevents taxpayers from obtaining a dual benefit: Depreciation on the Tax Component: Claiming depreciation under the Income Tax Act on the GST paid ( tax component ) included in the cost of capital goods. ITC on the Same Tax Component: Claiming ITC under GST laws on the same tax component. Complete Draft Replies of GST ITC Related Notices, Click Here Practical Application Proper Accounting Entries: To comply with Section 16(3), businesses should segregate the cost of capital goods and the tax component in their accounting records. Fixed Assets Account: Debit only the net cost ( excluding GST ) of the capital goods. ITC Account: Debit the GST amount paid on the capital goods. Depreciation Claims: Depreciation should be claimed only on the net cost of the capital goods, not on the GST component. By ensuring depreciation is not claimed on the GST component, businesses remain eligible to claim ITC on that tax amount. This is in line with the intention of Section 16(3) of the Central Goods and Services Tax Act, preventing the disallowance of ITC due to improper depreciation claims. Complete Draft Replies of GST ITC Related Notices, Click Here ITC on Machinery as Immovable Property: Section 17(5)(d) of the CGST Act Section 17(5)(d) of the CGST Act, 2017, specifies: “Input tax credit shall not be available in respect of the following, namely: goods or services or both received by a taxable person for construction of an immovable property ( other than plant or machinery ) on his own account including when such goods or services or both are used in the course or furtherance of business.”  Key Definitions Immovable Property: Generally refers to property that cannot be moved and is attached to the earth, such as land or buildings. Plant and Machinery: Defined within the GST framework as apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both. Complete Draft Replies of GST ITC Related Notices, Click Here Interpretation Exclusion of Plant and Machinery: Section 17(5)(d) explicitly excludes “plant and machinery” from the restriction on ITC claims for immovable property. Machinery Fixed to Earth: Machinery bolted or fixed to the ground for operational efficiency and safety does not become immovable property merely due to its fixed nature. Analysis Operational Necessity: Machinery may require secure installation to function correctly and ensure safety, which involves fixing it to the ground. Eligibility for ITC: Since “plant and machinery” are excluded from the immovable property clause, ITC on such machinery remains admissible even if it is fixed. Complete Draft Replies of GST ITC Related Notices, Click Here Legal Precedents Judicial Interpretations: Courts have held that machinery essential for business operations does not qualify as immovable property simply because it is affixed for stability. Tax Authorities’ Stance: There have been instances where tax authorities have incorrectly classified such machinery as immovable property, leading to disputes. By adhering to these principles, businesses can safeguard their ITC claims against disallowance and remain compliant with GST regulations. Complete Draft Replies of GST ITC Related Notices, Click Here Draft Format By clicking the blue button below, subscribers can access a draft format of the reply to GST Show Cause Notice issued against claims of Input Tax Credit and depreciation both on Capital Goods.