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VAT Credit on Capital Goods – Accounting Treatmemt

The VAT credit on capital goods may or may not be available immediately. To the extent VAT Credit is available immediately, the amounvat-credit-capital-goods-accounting-treatmentt in respect of thereof should be debited to an appropriate account, say, “VAT Credit Receivable ( Capital Goods Account)” and the balance which is not available immediately should be debited to another appropriate account, say “VAT Credit Deferred (Capital Goods) Account”. 

Subsequently, when the balance credit or a part thereof becomes available, the appropriate adjustment for the same should be made, i.e. the amount of credit becoming available should be credited to ‘VAT Credit Deferred (Capital Goods) Account’ with a corresponding debit to “VAT Credit Receivable (Capital Goods) Account”. 

Depreciation should be charged on the original cost of the fixed asset excluding the VAT Credit.

Credit of tax paid on capital goods 

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Credit will be available of tax paid on capital goods purchased within the State. Credit will be available only in respect of capital goods used in manufacture or processing. The credit will be spread over three financial years and not in first year itself. There will be a negative list of capital goods States has deviated from these provisions. In West Bengal and Kerala, it is available in 36 monthly instalments. In Karnataka, it is available in 12 monthly instalments, but value of capital goods should be minimum ` 10 lakhs. Capital goods of value less than ` 10 lakhs will be ‘inputs’ and immediate credit will be available. In Maharashtra, entire credit is available immediately.

No credit of CST paid – Credit of Central Sales Tax (CST) paid on inputs and capital goods purchased from other States will not be available . This appears to be discriminatory and violative of Articles 303 and 304(a) of Constitution.

Example : Compute the purchases eligible for availing input tax credit from the following particulars:—


Goods for resale within the State 10,000
Capital goods required for the purpose of the Manufacture or resale of taxable goods 14,000
Goods purchased from the unregistered dealer 3,200
Goods which are being utilized in the manufacture of exempted goods 6,600
High seas purchases 2,300

Answer :

Goods for resale within the State 10,000
Capital goods required for the purpose of the Manufacture or resale of taxable goods 14,000
Eligible input tax credit 24,000


R Ltd. of Gujarat made total purchases of input and capital goods for ` 65,00,000 during the month of January 2013. The following further information are as follows:

(i) Goods worth ` 25,00,000 were purchased from Tamil Nadu on which C.S.T @2% was paid.

(ii) The purchase made in January 2013 includes goods purchased from un-registered dealers amounting to ` 18,50,000.

(iii) It purchased capital goods for ` 6,50,000 (not eligible for Input Tax Credit) and those eligible for input tax credit for ` 9,00,000.

Sales made in the state of Gujarat for ` 10,00,000 on which VAT @12.50% during the month of January 2013. All purchases are exclusive of tax and VAT on purchases @4%. Calculate net VAT liability.

Note: Credit on capital goods is available in 36 equal monthly installments.

Answer :

Total Purchases in the month of January, 2013 65,00,000
Less: Interstate purchases (25,00,000)
Purchases from unregistered dealer (18,50,000)
Capital goods for which no ITC (6,50,000)
Total Purchases eligible for input tax credit 15,00 000
Less: Purchases (capital goods) eligible for input tax credit (9,00,000)
Purchases (other than capital goods) eligible for ITC 6,00,000


ITC on capital goods ` 9 lacs x 4% x 1/36 = ` 1,000

ITC on input goods ` 6 lacs x 4% = ` 24,000

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Total ITC = ` 25,000


VAT payable on sales ` 10 lacs x 12.5% = ` 1,25,000

Less: Input Tax Credit (ITC) receivable = ` (25,000)


Net VAT payable = ` 1,00,000


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