Section 16(3): Depreciation on the Tax Component Kills the Credit

Section 16 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

A company buys machinery for ₹1 crore plus ₹18 lakh GST. The accounts team capitalises ₹1.18 crore. The tax team claims ₹18 lakh of credit.

Both entries are made. Both cannot stand.

Section 16(3): where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed. It is an election, not a choice made twice — take the credit and expense the tax, or capitalise the tax and depreciate it. Not both.

The provision

One sentence, and it operates on a single fact: whether depreciation has been claimed on the tax component under the Income-tax Act.

Note what it does not say:

• it does not turn on how the item is recorded in the books for accounting purposes;
• it does not turn on whether the whole cost was capitalised, only on whether depreciation was claimed on the tax component;
• it is not limited to a particular class of assets — it covers capital goods and plant and machinery.

The two treatments

Treatment A — take the credit.

• Asset capitalised at ₹1,00,00,000.
• GST of ₹18,00,000 booked as input tax credit (a current asset), transferred to the electronic credit ledger.
• Income-tax depreciation computed on ₹1,00,00,000.

Treatment B — capitalise the tax.

• Asset capitalised at ₹1,18,00,000.
• No credit taken.
• Income-tax depreciation computed on ₹1,18,00,000.

Treatment A is almost always better. The credit is available immediately and in full; depreciation on the tax component is spread over the asset's life at the applicable rate and gives back only the tax effect of the deduction, not the amount itself.

Treatment B makes sense only where the credit is not available anyway — blocked under s.17(5), attributable to exempt output, or held by an unregistered or composition person. In those cases capitalising the tax and depreciating it recovers something rather than nothing.

The accounting position supports Treatment A

Ind AS 16 and AS 10 both provide that the cost of an item of property, plant and equipment comprises its purchase price including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

"Non-refundable" is the operative word. GST on which credit is available is recoverable, and therefore not part of the asset's cost. GST on which credit is blocked is non-refundable and should be capitalised.

So the accounting standard and s.16(3) point the same way: recoverable tax out of cost, non-recoverable tax into cost.

Where it goes wrong

Assets acquired before registration. No credit was available, so the tax was correctly capitalised. If the business later claims s.18(1) credit on capital goods, the capitalised amount must be adjusted and the depreciation recomputed. Section 18(1): ITC on stock at registration →

Blocked credit capitalised, then claimed. A motor vehicle blocked under s.17(5)(a) is capitalised with its GST. A later attempt to claim the credit — after a change in use, say — runs into s.16(3) because depreciation has already been claimed on the tax.

Partial capitalisation. Where an asset is used for both taxable and exempt output, credit is apportioned under Rule 43 and only the reversed portion should be capitalised. Capitalising the full tax and claiming apportioned credit engages s.16(3) on the credited part.

Fixed asset register not reconciled to the credit register. The single most common cause. The GST team claims credit; the finance team capitalises the gross invoice. Nobody reconciles until an auditor does.

The income-tax side

Section 43(1) of the Income-tax Act defines actual cost as the cost of the asset to the assessee reduced by that portion of the cost as has been met directly or indirectly by any other person or authority.

Where credit is taken, the tax is recovered from the Government, and the actual cost excludes it. So the two statutes align — the difficulty is operational, not conceptual.

Practical controls

• Reconcile the fixed asset register to the credit register every quarter, asset by asset.
• Flag blocked-credit assets at the point of capitalisation, so the GST is deliberately included in cost.
• Where Rule 43 apportionment applies, capitalise only the reversed portion, and do it in the year of reversal.
• On a change of use, recompute both the credit position and the depreciation base.
• Document the election for each asset class. Section 16(3) is a one-way door once depreciation has been claimed.
• Check the tax audit report disclosures, which surface the capitalised tax.

Key takeaways

• s.16(3) denies credit on the tax component where depreciation has been claimed on it under the Income-tax Act.
• It is an election — credit or depreciation, not both.
• Ind AS 16 and AS 10 capitalise only non-refundable taxes, aligning with s.16(3).
• Treatment A — take the credit, capitalise net — is better wherever credit is available.
• Capitalise the tax only where the credit is blocked or otherwise unavailable.
• The failure mode is a fixed asset register out of step with the credit register.

Read next

• Rule 43: Capital Goods and the Sixty-Month Rule
• ITC on Capital Goods: Rules, Depreciation and Reversal
• Blocked ITC Under Section 17(5)
• Section 18(1): Claiming ITC on Stock When You Register

Disclaimer: Positions stated as on 5 September 2026, based on the CGST Act as amended to 31 March 2026 (ICAI Bare Law, 12th edition).