Is Input tax to be reversed in case of supply of capital goods

Yes fully
No
Yes, to extent of credit taken as reduced by prescribed percentage or tax on transaction value whichever is higher
Yes to the extent of transaction value of such goods

The correct answer is C.

Input tax is to be reversed in case of supply of capital goods, to the extent of credit taken as reduced by prescribed percentage or tax on transaction value whichever is higher.

This is because, when capital goods are supplied, the recipient is entitled to take input tax credit on the purchase of such goods. However, if the capital goods are not used for the purpose of business, the recipient is required to reverse the input tax credit that was taken.

The amount of input tax that is required to be reversed is calculated as follows:

  • Input tax credit taken on the purchase of the capital goods
  • Less: Prescribed percentage (which is usually 10%)
  • Less: Tax on transaction value of the capital goods

The higher of the two amounts is the amount of input tax that is required to be reversed.

For example, if a business purchases capital goods worth Rs. 100,000 and takes input tax credit of Rs. 18,000, and the prescribed percentage is 10%, then the amount of input tax that is required to be reversed is Rs. 12,000 (18,000 – 10% of 100,000).

The reversal of input tax is required to be done within one year from the date of supply of the capital goods.

The reversal of input tax can be done by debiting the input tax credit account and crediting the output tax account.

The reversal of input tax can also be done by filing a revised return for the period in which the capital goods were supplied.

The reversal of input tax is a complex process and it is advisable to consult a tax expert before taking any action.