Claim ITC or Take Depreciation? One Wrong Move Can Cost You Big!

 

Blocked Credit on Fixed Assets if Depreciation is Claimed

Introduction

Under Goods and Services Tax, Input Tax Credit (ITC) is one of the most powerful tools available to businesses for reducing tax liability. However, the law clearly restricts double benefits in respect of capital goods.

One such important restriction is related to fixed assets where depreciation is claimed under the Income Tax law.

This article explains the concept in an absolute, practical, and legally correct manner.

⚖️ Legal Provision

As per Section 16(3) of the Central Goods and Services Tax Act, 2017:

If a registered person has claimed depreciation on the tax component (GST) of the cost of capital goods under the Income Tax Act, 1961,
then Input Tax Credit (ITC) shall NOT be allowed on such tax component.

🔍 Meaning in Simple Terms

👉 If you include GST amount in the cost of asset and claim depreciation on it:

❌ You cannot claim ITC of that GST

👉 If you want to claim ITC:

✅ You must exclude GST from the cost of asset

📊 Practical Illustration

Case 1: Depreciation Claimed on GST (Wrong for ITC)

• Asset Value = ₹1,00,000
• GST = ₹18,000
• Total capitalized = ₹1,18,000
• Depreciation claimed on ₹1,18,000

👉 Result:
❌ ITC of ₹18,000 NOT allowed

Case 2: ITC Claimed (Correct Approach)

• Asset Value = ₹1,00,000
• GST = ₹18,000 (claimed as ITC)
• Capitalized value = ₹1,00,000

👉 Result:
✅ ITC allowed = ₹18,000
✅ Depreciation only on ₹1,00,000

⚠️ Important Clarification

👉 This is NOT exactly “blocked credit” under Section 17(5)

Instead, it is a conditional restriction under Section 16(3)

But practically, it acts like blocked credit if depreciation is claimed on GST.

🧠 Key Points to Remember

• ✔️ ITC and Depreciation cannot be claimed together on same GST component
• ✔️ Choice must be made at the time of capitalization
• ✔️ Once depreciation is claimed including GST → ITC becomes permanently ineligible
• ✔️ Applicable only to capital goods / fixed assets

❌ Common Mistakes by Taxpayers

1. Claiming ITC in GST return
2. Also capitalizing full amount including GST
3. Claiming depreciation on total value

👉 This leads to:

• Disallowance of ITC
• Demand + interest + penalty

💼 Practical Guidance for Professionals

As a CA/consultant, always ensure:

• Proper asset capitalization policy
• Reconciliation between:
• Fixed asset register
• GST ITC claimed
• Client awareness before finalization of accounts

🔚 Conclusion

The law is very clear:

👉 No double benefit is allowed

A taxpayer must choose either:

• ITC under GST, OR
• Depreciation under Income Tax on GST component

Making the right choice ensures:

• Compliance
• Tax efficiency
• Avoidance of litigation

 

“Can You Claim ITC on Fixed Assets if Depreciation is Taken? GST Law Explained”

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