Taxation · Input Tax Credit

Special Cases of ITC: Capital Goods, Job Work and Distribution

Updated 4 October 2026 · Fact-checked

Special ITC cases are situations where GST credit is claimed, reversed or moved in a different way. ITC is not allowed on the tax part if you claim depreciation on it. Job work goods must return within one year (inputs) or three years (capital goods). A change of registration needs stock-based credit or transfer. An ISD distributes common input service credit by turnover.

Understand Special Cases of ITC: Capital Goods, Job Work and Distribution

Normal ITC is simple: you buy for business, hold a valid invoice, receive the goods or services, and claim the credit. Special cases arise when the usual picture changes. The asset lasts for years, the goods leave your premises for processing, your business changes form, or one office pays the tax for many.

Capital goods. These are goods whose cost is capitalised in your books and used in the course or furtherance of business. You may claim the full ITC in one go, not spread over years. The price is a condition: if you claim income-tax depreciation on the tax component of the cost, ITC on that component is not allowed. You must choose one benefit. If you later sell the asset, you must give back part of the credit, because you have used it for only part of its life.

Job work. A principal sends inputs or capital goods to a job worker for processing. The principal can take ITC on those goods even though they never reach his own premises, and may take it when they are sent straight from the supplier to the job worker. The condition is that they come back in time: inputs within one year, capital goods within three years. Moulds, dies, jigs, fixtures and tools have no time limit. If not returned in time, the sending is treated as a supply from the date it was sent, and the principal pays tax with interest.

Change in registration status. When a person becomes entitled to ITC (new registration, switch from composition to regular, exempt supplies becoming taxable), he may claim ITC on stock, semi-finished and finished goods, and capital goods held on that day. Capital goods credit is reduced by 5 percentage points for every quarter or part of a quarter since the invoice date. In the opposite case (switch to composition, supplies turn exempt, or registration cancelled), he must pay back the credit on stock and capital goods, with a similar reduction for capital goods. On sale, merger, demerger, amalgamation, lease or transfer of a business with liabilities transferred, the unutilised balance in the electronic credit ledger moves to the transferee. The transfer is supported by a certificate from a chartered accountant or cost accountant, as the rules require.

Input Service Distributor (ISD). A head office often receives invoices for services that benefit many branches in different states (audit, advertising, software). The ISD is an office that receives these invoices and passes the credit to the branches that bear the cost. It issues an ISD invoice (or credit note) for the distribution, so each recipient has a document to claim credit on.

Key rules to remember

Depreciation and ITC on capital goods: If depreciation is claimed on the tax component of a capital good, ITC on that tax component is not allowed; You may claim ITC or depreciation on the tax part, never both. Depreciation on the cost without tax is not affected.
Supply of capital goods on which ITC was taken: Amount to pay = higher of (a) ITC taken – 5% points × number of quarters or part thereof from invoice date, and (b) GST on transaction value; Applies when you sell used capital goods or plant and machinery. Not applicable to goods on which only depreciation (no ITC) was taken; for those, tax is on the transaction value.
ITC on capital goods when becoming eligible: Eligible ITC = ITC on invoice × (100% – 5% × quarters or part thereof from invoice date); Used for new registration, composition to regular, and exempt to taxable cases.
Reversal on switching out (capital goods): Reverse the same reduced ITC figure, or tax on transaction value, whichever is higher; Pay by debit to the electronic credit ledger or cash ledger, as the rules provide. For stock, reverse ITC on the stock held on the day.
Job work time limits: Inputs: back within 1 year. Capital goods: back within 3 years. Moulds, dies, jigs, fixtures, tools: no limit; If not returned in time, treat as supply on the date of sending, with interest.
ISD distribution: Recipient's share = ISD credit × recipient's turnover in the State ÷ total turnover of all recipients to whom the credit relates; Credit attributable to one recipient goes only to that recipient. Use the turnover of the relevant period as the rules prescribe, normally the preceding financial year.
ISD distribution – tax type: Same State: CGST/SGST as CGST/SGST. Different State: CGST/SGST as IGST. IGST as IGST; Distribute in the same month the credit is received. Distribution can't exceed credit available.
Change in constitution: Unutilised ITC in the electronic credit ledger moves to the transferee on sale, merger, demerger, amalgamation, lease or transfer, if liabilities are transferred; Needs a CA or cost accountant certificate and the prescribed form.

How to solve Special Cases of ITC: Capital Goods, Job Work and Distribution questions

Special-case questions look different but follow the same logic. First identify which situation you are in, then apply its rule exactly.

1Identify the case: capital goods, job work, change of registration or status, or ISD distribution.
2Check basic eligibility: business use, valid invoice, receipt of goods, and no blocked credit.
3For capital goods, check whether depreciation was claimed on the tax component. If yes, no ITC on that part.
4For a sale or switch-out, count quarters from the invoice date. Count a part quarter as a full quarter. Reduce ITC by 5 percentage points per quarter.
5For a sale, compute GST on transaction value too, and pay the higher figure.
6For job work, check the return period and the type of goods. If time is exceeded, treat as supply with interest.
7For ISD, separate credit attributable to one recipient from common credit. Share the common credit by turnover ratio and convert the tax type according to the State.
8Write the answer as: provision, facts, working, conclusion.

Quickest way: Case-first shortcut for MCQs and written answers

When to use it: Use it in the exam hall when you have under four minutes for a question of this kind.

Underline the trigger words: depreciation, sold, job worker, composition, merger, ISD, branch.
Depreciation on tax part means no ITC. This single rule solves many MCQs.
Capital goods sold or switched out: compute (100 – 5 × quarters)% of the ITC, compute tax on sale value, and take the higher.
Job work: say 1 year for inputs and 3 years for capital goods. Tools have no limit.
ISD: write turnover ratio first, then split. Different State means IGST.
For MCQs, no negative marking applies, so always attempt every one. Eliminate options that break the 5% quarter rule or the time limits.
For written answers, put the rule in one line, show the working in a small table-like list of lines, and end with a one-line conclusion. That format earns step marks even if one figure goes wrong.

Common mistakes in Special Cases of ITC: Capital Goods, Job Work and Distribution

Claiming both ITC and depreciation on the tax part of a capital good
Students treat them as two separate benefits because they come from two different laws.
Fix: Remember the rule: depreciation on the tax component kills ITC on that component. Pick one.
Spreading ITC on capital goods over five years
Older rules or other countries' VAT systems are mixed up with GST.
Fix: Under GST you claim full ITC in one go, subject to the conditions.
Counting a part quarter as zero when reducing capital goods credit
Students count only complete quarters.
Fix: The law says 'quarter or part thereof'. A part quarter counts as a full quarter.
Paying only the reduced ITC on sale of used capital goods without comparing it with tax on transaction value
The 'higher of' test is forgotten.
Fix: Always compute both figures and write which is higher before concluding.
Applying one time limit to all job work goods
The one-year and three-year limits are mixed up.
Fix: Inputs: one year. Capital goods: three years. Moulds, dies, jigs, fixtures and tools: no limit.
Distributing ISD credit by plain division or by the recipients' current-month turnover
Students ignore the rule that common credit goes by turnover ratio and that attributable credit goes only to its recipient.
Fix: Split first into attributable and common credit. Then use the turnover ratio of the relevant period on the common part.

Worked examples

Example 1

Beta Ltd bought a machine on 1 April 2025 for ₹10,00,000 plus 18% GST and took full ITC. It claimed no depreciation on the tax part. On 10 November 2026 it sold the machine for ₹6,00,000 plus GST at 18%. Find the amount Beta Ltd must pay.

Show the solution

ITC taken on purchase = 18% of ₹10,00,000 = ₹1,80,000.
Count quarters from 1 April 2025 to 10 November 2026: April 2025–March 2026 = 4 quarters; April–June 2026 = 1; July–September 2026 = 1; 1 October to 10 November 2026 is a part quarter = 1. Total = 7 quarters.
Reduction = 7 × 5 = 35 percentage points. ITC remaining = 65% of ₹1,80,000 = ₹1,17,000.
Tax on transaction value = 18% of ₹6,00,000 = ₹1,08,000.
Compare: ₹1,17,000 is higher than ₹1,08,000.

Answer: Beta Ltd must pay ₹1,17,000, being the higher of the two amounts.

Example 2

Head office (HO) in Maharashtra, registered as an ISD, receives an invoice for common advertising services worth ₹5,00,000 with CGST ₹45,000 and SGST ₹45,000. The services benefit three branches: A (Maharashtra, turnover ₹4 crore), B (Maharashtra, ₹2 crore) and C (Gujarat, ₹4 crore). Turnover is of the relevant period. Compute the credit to be distributed to each branch.

Show the solution

Total ITC available = ₹45,000 + ₹45,000 = ₹90,000. It relates to all three branches, so it is common credit.
Total turnover = ₹4 + ₹2 + ₹4 = ₹10 crore.
A's share = 4/10 × ₹90,000 = ₹36,000. As A is in the same State, split as CGST ₹18,000 and SGST ₹18,000.
B's share = 2/10 × ₹90,000 = ₹18,000. Same State, so CGST ₹9,000 and SGST ₹9,000.
C's share = 4/10 × ₹90,000 = ₹36,000. C is in a different State, so the credit is distributed as IGST ₹36,000.
Check: ₹36,000 + ₹18,000 + ₹36,000 = ₹90,000.
HO issues an ISD invoice for each distribution in the same month as it receives the credit.

Answer: A gets CGST ₹18,000 and SGST ₹18,000; B gets CGST ₹9,000 and SGST ₹9,000; C gets IGST ₹36,000.

Exam tips

For capital goods, always state the depreciation condition first, then give any numbers. Many written questions test only this link.
In reversal problems, show the quarter count in a separate line. Examiners give marks for the count even if the final figure is off.
Job work questions often give dates. Check whether goods are inputs or capital goods before you test the time limit.
For ISD questions, check whether any credit is attributable to a single recipient before you apply the turnover ratio.
In MCQs, watch for options that look alike, such as '1 year' and '3 years'. Match the type of goods with its limit.

Practice questions from Input Tax Credit

Special Cases of ITC: Capital Goods, Job Work and Distribution in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalSpecial Cases: Capital Goods, Change in Constitution and Transitions

Special Cases of ITC: Capital Goods, Job Work and Distribution: frequently asked questions

Can I claim ITC on a capital good and also claim depreciation?

You can claim depreciation on the cost excluding tax and ITC on the tax. If you claim depreciation on the tax component, ITC on that component is not allowed. So you must choose one for the tax part.

What happens if goods sent for job work are not returned in time?

The sending is treated as a supply by the principal on the date the goods were sent. The principal pays GST with interest. The time limit is one year for inputs and three years for capital goods, with no limit for tools such as moulds and dies.

How is ITC treated when a business is merged or sold?

If the transfer includes liabilities, the unutilised ITC in the electronic credit ledger can be moved to the transferee. The transfer needs a certificate from a chartered accountant or cost accountant, as the rules prescribe.

What does an Input Service Distributor do?

An ISD is an office that receives invoices for input services used by several branches and passes the credit to them. It issues an ISD invoice, distributes in the month of receipt, and splits common credit by turnover ratio of the recipients.