Chandani Nawalkha

Section 18 of the CGST Act,

(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:

The above provision of law covers the situation wherein capital goods are being sold after use and it stipulates that in such cases amount payable by the supplier has to be either Input Tax Credit as reduced by percentage points as may be specified in rules or tax on transaction values whichever is higher.

Under Rule 40(2) of the CGST Rules it has been prescribed that for the purpose of Section 18(6), input tax credit in the case of supply of capital goods and plant and machinery shall be calculated by reducing five percentage point for every quarter or part thereof from the date of issue of invoice for the capital goods.

Therefore in the words of Section 18 either the ITC as reduced by percentage points would be payable or either tax on transaction would be payable.  It is absolutely certain that if the tax on transaction value is higher than the ITC worked out under Rule 40 then nothing remains to be done viz. paid or reversed in respect of ITC already availed

However if we dig deeper into the CGST Rules we find that Rule 40 is not the only place where reference of Section 18(6) is given. The question of reversal of ITC in such cases has also been dealt by entry no. (6) Of Rule 44 of CGST Rules, 2017: Manner of Reversal of ITC under Special Circumstances which reads as under:-

“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:”          

“……………..Clause (b) of sub rule 1 of same rules states that :

(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………….”

Therefore going by the above, for the purpose of Section 18(6) reversal of ITC is to be made for remaining useful life of assets on pro rata basis by taking total useful life of assets as five years.

Thus there are two rules governing the issue of ITC under Section 18(6). However if we look closely to the method prescribed in both the rules we find that they are serving same dish in different packaging i.e.

In Rule 44 the useful life of asset has to be 5 years and similarly under Rule 40 if we go by analogy of 5% per quarter or part thereof the useful life of asset would always be 5 years. So it would not make difference as to what rule you opt for the purpose of Section 18(6) the answer will more or less will be the same.

Let take an example where asset was used for 9 months and ITC availed on it is Rs 7, 18,000. Taking total life of asset is 5 years i.e. 60 months, remaining useful Life of a capital good is 51 months.

If we go by Rule 44 credit to be reversed will be :

= Rs 718000*51/60 months i.e. Rs 6,10,300

If we go by Rule 40 credit to be reversed will be:

= Rs 718000 – [ 5% * 3 quarters to say 9 months) i.e. 610300


The author is chartered accountant offering GST advisory & consulting and can be contacted on 8386999398 or email : [email protected]

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One Comment

  1. Mahesh Pillai says:

    Hi Chandini,

    A small observation – while it will not make a difference as long as you use a completed quarter for calculation, however if you use incomplete quarter there will be difference .
    for example : please recalculate the GST taking 10 months example
    There is indeed inconsistency between the two provisions prescribing two different formula and hence, cannot be implemented together . A CBIC clarification in this regard will be useful

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October 2021