GST on sale of Capital Goods
What Is Meant by Capital Goods Under GST?
Capital goods are assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services.
ITC Reversal on Sale of Capital Goods
When Capital Goods are sold, the input tax credit on capital goods must be reversed based on the remaining useful life of the assets. Rule 44(6) The reversal is calculated on a pro-rata basis, considering the asset’s useful life as 5 years.
Suppose capital goods were used for 4 years 6 months and 15 days, leaving remaining useful life of approximately 5 months for the taxable person. If the ITC claimed on these capital goods was ₹5,00,000 the proportionate ITC to be reversed is calculated as follows:
Input Tax Credit Attributable to be reversed = C*5/60
ITC to be reversed = 5,00,000*5/60 = 41,666
This amount must be separately computed for Tax and added to the output tax liability.
Taxable Value of the Sale of Capital Goods
1.Book Value and Depreciation:
The taxable value of utilized fixed assets is typically the book value, depreciated. Depreciation adjusts the asset’s book value to reflect wear and tear, among other things. As a result, this is an easily understandable corrected amount that may be used to accurately calculate your GST. For example, if an asset is sold after many years of use, the tax value will be based on its current depreciated value.
2. Market Value Consideration:
If the assets are sold for less than its market value, GST will be based on the market value and not the sales price.
3.Invoice and Agreement:
The value stated on the sale invoice by the seller is very important as it directly impacts the taxable value. Moreover, the terms agreed upon between the buyer and seller, including any discounts or adjustments, should be included in the sale invoice.
GST liability on sale of Capital goods
Section 18(6) “In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher:
Let’s summarize : sec 18(6)mandates that a registered person selling capital goods on which ITC was availed must PAY an amount equal to:
- The input tax credit taken on the said capital goods or plant and machinery reduced at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods
OR
- The tax payable on the transaction value of the capital goods (determined under Section 15), whichever is higher.
Two Methods for ITC Reversal: Rule 40(2) vs. Rule 44(6)
Rule 40(2): This rule prescribes a fixed reduction of 5% on the ITC for every quarter or part thereof, from the date of invoice issuance for the capital goods.
Rule 44(6): This rule mandates calculating the ITC reversal based on the remaining useful life of the capital goods, considering a notional life of 5 years. The ITC reversal is proportional to the remaining useful life expressed in months
Example of Calculating the Taxable Value of the Sale of Fixed Assets:
Scenario: Harshitha, a registered person, purchase machinery for business purpose of Rs,100,000/- in July 2023 and claimed ITC of Rs.18,000/- they sell the machine in Dec 2024 for Rs.60,000/-
Calculation under Rule 40(2):
(Number of Quarters *5%) *ITC = 6 quarters * 5%
Rs.5,400/-(18,000*5%*6)
Reduced ITC = 12,600(18,000-5,400)
Tax on transaction Value (assuming 18% GST) = 10,800(60,000*18%)
Higher amount: 12,600/-
Calculation under Rule 44(6):
(Remaining Useful Life in Months / Notional Life (60 months)) * ITC = (42 / 60 months) * ₹18,000
Reduced ITC = (42 months / 60 months) * ₹18,000 = ₹12,600/-
From the above Scenario, However, if we go strictly by the phrase used in Section 18 (6), provisions of Rule 40(2) seems more appropriate as it prescribes a method of determining the input tax credit with reduction in the percentage point unlike the pro rata basis as mentioned in the other rule. But the department may adopt the provision which is more beneficial to it and may demand credit reversal / amount payable as per Rule 44(6). If such an interpretation is adopted, taxpayers (sellers) will have to take the hit of incremental liability on himself in such instances. Besides this, it will also prejudice the subsequent buyer as he will only be entitled to avail the input tax credit to the extent of GST calculated on the transaction value i.e., Rs. 60,000/- as mentioned in the supply invoice used for disposal of used capital goods whereas the government will get tax revenue of Rs. 12,600/-.
