Capital goods refer to manufactured goods that are used in the production of other goods or services. They include buildings, machinery, tools, vehicles, and equipment. When procuring capital goods, only 50% of applicable taxes can be claimed as input tax credit in the first year, with the remaining 50% credited in subsequent years. The procurement process in SAP involves creating material and vendor masters, generating a purchase requisition and purchase order, receiving goods, posting invoices, and transferring the remaining tax credit in the second year. Key aspects like asset values, tax determinations, and account assignments must be properly configured.

1. Capital ProcurementinSAP
Capital goods aregenerally man-made, and do not includenatural resources such asland or minerals,or human capital —the
intellectual and physical skillsand labor provided by human workers.
One should not confuse the economic term capital goods and the financial term capital (economics),which simply means
wealth.
Characteristics:
Capital goodsfall underdepreciation.
It shall godirectlyintoasset/stock dependsuponinventorymanagement.
MRP neednotbe maincriteriaforcapital goods.
Partial (50%) cenvatcreditshall be availedinthe firstyearand the balance cenvatcreditinthe
subsequentyeardependsuponthe eligibilitycriteria.
Capital goodsshall be procuredandget intoinventory,laterthe same shall be issuedtoAsset.
Cenvatcreditshall notbe availedforall the capital materials.
A natural resource doesnotfall undercapital goods.
Purpose:
The main purpose of the capital goodsmeantforpositive return.
It shall helptoproducingothergoods/ servicing.
It shall give the employer/employee comfort.
Examples:
Buildings
Machineries
Tools
Buildingaccessories
Consumables
Office equipment’s andaccessories
Vehicles
Utility equipment’s
Set off for Capital goods
Criteria for Eligibility / Non eligibility
Capital goods Eligible for input tax credit
In case of VAT the respective capital goods shall be procured from local registered dealers / manufacturers.
In case of Excise orcustom dutyinvolved,the respective capital goodsshallbe procuredanywhere
(globallyorlocal)
Capital goodsforthe purpose of manufacturing,processing,packingorstoringof goodsin the course of
business.
Capital goodsforthe purpose of servicing,asinthe case of transportindustry.
Capital goods not eligible for input tax credit
Capital goods used for civil structures.
Capital goods used exclusively or partially for the manufacture of goods that are exempted from tax
Capital goods used exclusively or partially for job work
Capital goods used for the officeadministrativepurposeor for the benefit of proprietor/Partners/Directors or
employees

2. In caseof VAT, capital goods purchased fromoutside the state.
Tax credit adjustment - Overview
Adjusting of tax credit
Adjusting of tax credit – Import procurement
Input tax creditcan be taken up to 50% (Counter veilingduty (CVD)) in the firstyear.
The remainingcredit(50%) can be taken in the second and third financial year respectively.
For Additional duty of customs (ADC), full 100%duty paid can be taken in the firstyear itself.No need to wait for the second
year.
In additionally,a manufacturer can take full creditof Additional duty of customs (ADC) but a serviceprovider (In the case of
fleet operator) cannottake creditof Additional duty of customs (ADC) paid duringimport.
The unavailed duty credit at the end of the third financial year shall lapseto the Government
The paid duty shall betaken firstyear up to the third year.
Adjusting of tax credit – Domestic procurement with Excise
Input tax creditcan be taken up to 50% (Exciseduty (ED), Ecess & SEcess) in the firstyear.
The remainingcredit(50%) can be taken in the second and third financial year respectively.
The unavailed duty credit at the end of the third financial year shall lapseto the Government.
Capital Procurement vs SAP
Capital procurement cycle
Flow chart & Cycle
The following flow chart shows the procurement cycle of capital goods.
Create PR/PO
Release PR/PO
Post Goods
receipt andPost
Cenvat - Part I
and Par t - II
Only50% Cenvat
is availed
Logistics
Invoice
Verification
Balance50%
Cenvat to be
transferred to
RG23C

3. Capital Procurement in SAP
Create a material master – MM01
Create a Vendor master – XK01
Create an Asset master – AS01
Maintain Chapter id & Cenvat determination – J1ID
Create a PR for a material with account assignment category A, ME51N (Optional)
Create a P.O. for vendor / Material with account assignment category A, asset number – ME21N
Release of capital order (Optional) – ME29N
Goods receipt & Capture the Excise invoice – MIGO
Post the Excise invoice by using internal excise number – J1IEX
Invoice verification for the asset purchased - MIRO
Transfer credit in the second year – J2I8
Check the asset value – AW01N
Material Master and Vendor Master Creation
Material master shall be created with ERSA / HIBE / UNBW material type.
Material type shall be copied from standard material type and modified according to our business requirement
It should have Purchasing & account views
Vendor master shall be created with respect to normal practice.
T code for the above procedure is MM01 & XK01.