Sale of Capital Goods under GST

In the practical scenario every business sells the capital goods and the sale of machineries are very common in the business lines due to outdated, obsolete or diminished productive capacity of old machines. There can be situations when any capital goods which are purchased in pre GST period and sold in Post GST period. Also there can be the cases where capital goods are purchased in post GST regime and sold in post GST regime. In this article there will be a detailed discussion on the sale of capital goods.

Before going into a detailed discussion, let’s first understand the meaning of capital goods. Sub section 19 of section 2 of CGST Act 2017 defines the capital goods as follows;
“(19) capital goods means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business”

Thus from the above definition of capital goods it is clear that, capital goods are those which are capitalised in the books and are to be used in furtherance of business. Hence, goods which are used for personal use are not capital goods.

The provisions relating to sale of capital goods are contained in sub section 6 of section 18 of CGST Act 2017 which states that “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”

Further Rule 40(2) of CGST Rules 2017 states that;
“(2) The amount of credit in the case of supply of capital goods or plant and machinery, for the purposes of sub-section (6) of section 18 , shall be calculated by reducing the input tax on the said goods 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”.

Thus on the conjoint reading of section 18(6) and rule 40(2) it can be concluded that in case of sale of capital goods on which ITC has been taken the tax amount would be the higher of the following;
(i) ITC taken on such capital goods as reduced by 5% per quarter or part thereof from the date of invoice OR
(ii) Tax on transaction value u/s 15.

Let’s understand the above provision with the help of an example;
Machinery purchased on 07.06.2023 of Rs. 7,00,000 
ITC availed on Machinery : 1,26,000
Machinery sold on 22.06.2024 of Rs. 537115

So GST payable will be higher of:
(i) Tax on transaction value =537115*18%= 96681
(ii) ITC taken on such capital goods as reduced by 5% per quarter or part thereof form the date of purchase = 126000-(5%per quarter for 5 quarters)= 94500/-

Higher of which is 96681/-, hence the tax payable in this case would be 96,681/-

Further Rule 44 of CGST Rules 2017 prescribes the manner of reversal of credit under special circumstances. The said rule 44 is laid down as follows;
“(1) The amount of input tax credit relating to inputs held in stock, inputs contained in semi-finished and finished goods held in stock, and capital goods held in stock shall, for the purposes of sub-section (4) of section 18 or sub-section (5) of section 29, be determined in the following manner, namely,-

(a) for inputs held in stock and inputs contained in semi-finished and finished goods held in stock, the input tax credit shall be calculated proportionately on the basis of the corresponding invoices on which credit had been availed by the registered taxable person on such inputs;

(b) for capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on pro-rata basis, taking the useful life as five years.

Illustration: Capital goods have been in use for 4 years, 6 month and 15 days.
The useful remaining life in months= 5 months ignoring a part of the month.
Input tax credit taken on such capital goods = C
Input tax credit attributable to remaining useful life= C multiplied by 5/60

(2) The amount, as specified in sub-rule (1) shall be determined separately for input tax credit of capital goods, State tax, Union territory tax and integrated tax.

(3) Where the tax invoices related to the inputs held in stock are not available, the registered person shall estimate the amount under sub-rule (1) based on the prevailing market price of the goods on the effective date of the occurrence of any of the events specified in sub-section (4) of section 18 or, as the case may be, sub-section (5) of section 29

(4) The amount determined under sub-rule (1) shall form part of the output tax liability of the registered person and the details of the amount shall be furnished in FORM GST ITC- 03, where such amount relates to any event specified in sub-section (4) of section 18 and in FORM GSTR-10, where such amount relates to the cancellation of registration.

(5) The details furnished in accordance with sub-rule (3) shall be duly certified by a practicing chartered accountant or cost accountant.

(6) The amount of input tax credit for the purposes of sub-section (6) of section 18 relating to capital goods shall be determined in the same manner as specified in clause (b) of sub-rule (1) and the amount shall be determined separately for input tax credit of central tax, State tax, Union territory tax and integrated tax:

Provided that where the amount so determined is more than the tax determined on the transaction value of the capital goods, the amount determined shall form part of the output tax liability and the same shall be furnished in FORM GSTR-1”.
Let’s discuss the above rule 44(b) with the help of an example;
Purchase price of capital goods: 2,00,000
ITC availed on such goods: 36,000
Capital goods already in use for: 2 years 6 months
Remaining life: 30 months (5 years minus 2 years & 6 months)
Transaction/Sale Value: 80,000
So GST payable will be higher of:
Tax on transaction value = 80,000*18%= 14400
ITC attributable to remaining useful life = 36,000*30/60= 18000;
Higher of which is 18000.

Till now we have discussed the taxability of capital goods on which ITC has been availed by the taxpayers. Now the next question that comes in mind is what would be the tax liability if ITC is not claimed on such capital goods.

In this situation it is important to know that as per section 7(1)(a) of CGST Act, supply includes all forms of supply of goods or services or both made or agreed to be made for a consideration by a person in the course or furtherance of business. Thus for a transaction to be considered as a supply there should be a consideration except the activities specified in schedule I. Which means that when goods (which includes Capital Goods) are transferred for consideration whether ITC is availed or not, such transfer is considered as Supply.

From the above discussion, it is clear that if capital goods are supplied for consideration then GST has to be paid even though ITC has not been availed on it but such capital goods used for business purposes. In such case since ITC has not been availed hence Section 18(6) and Rule 40(2) or 44(6) is not applicable as all these provisions deal with cases where ITC has been availed. Accordingly, in such situation the GST would be leviable on the transaction value in which such capital goods are sold.

In addition to the above there can be two another situations also:
(i) Sale of capital goods without consideration on which ITC was availed at the time of purchase.
(ii) Sale of capital goods without consideration on which ITC was not availed at the time of purchase.

Let’s discuss both of the above situations one by one. In case when the capital goods on which ITC was availed are supplied free of cost basis. Cases such as unintentional transfer of Capital goods due to goods lost in fire, obsolete, gifts made etc. would also be covered under this situation when capital goods are transferred without consideration but ITC was availed. What would be the GST implications?

As there is no consideration involved, we have to check whether such transaction is covered under schedule I or not.  As per para 1 of Schedule I of CGST Act 2017 “Permanent transfer or disposal of business assets on which ITC has been availed on such assets” shall be considered as supply, even without consideration.

Hence, sale of capital goods without consideration when ITC is availed would be treated as supply as per para 1 of schedule I of CGST Act 2017. For determining the value of supply lets move towards section 15 of CGST Act 2017. Section 15 of CGST Act states that the value of a supply of goods and/or services shall be the transaction value, that is the price actually paid or payable for the said supply of goods and/or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

In case when capital good is transferred without consideration and ITC is availed, since no price is there for the transaction, section 15 cannot be applied and valuation shall be done as per Valuation Rules. Rule 27 of the CGST Rules, 2017 states that value of supply of goods or services where consideration is not wholly in money, shall be the open market value of the capital good so transferred.

(ii) In second situation where the capital goods were sold without consideration and ITC was also not availed at the time of purchase. This situation would not be covered under section 7(1), as for a transaction to be covered under section 7(1), there must be a flow of consideration. This situation would also not covered under schedule I of CGST Act 2017, as for a transaction to be covered under para 1 of schedule I there must be permanent transfer or disposal of assets on which ITC was claimed. Accordingly, such transaction would not be considered as supply and hence no GST payable on such transaction.

The next question that comes here is that what would be a situation where the capital goods are purchased under pre GST regime and sold in post GST regime. In such case as the ITC is not claimed under GST on such purchases, hence Section 18(6) and Rule 40 (2) or 44(6) is not applicable as all these provisions deal with cases where ITC has been availed. Accordingly, in such situation the GST would be leviable on the transaction value in which such capital goods are sold.

From the above detailed discussion about the sale of capital goods and understanding of the various provisions of GST in this regard, we can move towards conclusion.

Conclusion: If the capital goods are procured in the GST regime and ITC was claimed at the time of purchase, then supply of such capital goods would be governed by the provisions of section 18(6) of CGST Act 2017 along with Rule 40(2) or 44(6) of CGST Rules 2017. However, if ITC was not claimed at the time of purchase then section 18(6) and relevant rules would not be applicable on such transaction and GST  would be payable on transaction value in this case. Similarly if the capital goods are procured in pre GST period and sold in post GST period then GST  would be payable on transaction value.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.