GST on Sale of Capital Goods: Section 18(6) of the CGST Act, 2017 and Rule 44(6) of CGST Rules, 2017
Summary: Under GST law, specifically Section 18(6) read with Rule 44(6), a specific calculation applies when a business sells capital goods on which it had previously claimed Input Tax Credit (ITC). The GST liability on such a sale is determined as the higher of two amounts: the GST payable based on the actual transaction value (selling price) of the capital goods, or the amount of ITC claimed on the goods proportionate to their remaining useful life. For this calculation, the useful life of capital goods is typically considered as five years or sixty months. The proportionate ITC is computed pro-rata for the period from the date of sale until the completion of the sixty-month period from the purchase date, with even partial months being rounded up to a full month. This calculated amount represents the ‘reduced ITC’. The business must pay the higher of the GST on the selling price or this reduced ITC amount. This calculated liability is required to be reported as an output tax liability in GSTR-1 and should not be adjusted or shown as an ITC reversal in Table 4B of GSTR-3B. For reporting in GSTR-1, the taxable value may need to be adjusted upwards so that the standard GST rate on that value equals the higher liability amount. The recipient, however, can only claim ITC based on the actual GST charged on the transaction value, not the potentially grossed-up value shown in GSTR-1.
1. Section 18(6) of CGST Act, 2017:-
On sale of capital goods, GST payable should be the higher of:
1. GST levied on the transaction value of capital goods
Or
2. ITC amount calculated as per the prescribed rule (Reduced ITC)
2. Rule 44(6) of CGST Rule, 2017:-
2. 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 (60 months).
1. ITC claimed at the time of purchase:
- Yes: This rule will be applicable
- No: This rule will not be applicable
2. ITC claimed at the time of purchase:
-
- Yes: This rule will be applicable
Now check, Capital goods sold within 5 years:
- Yes: This rule will be applicable
- No: This rule will not be applicable
3. ITC claimed at the time of purchase:
- No: This rule will not be applicable
In this case, the GST charged on the selling price will be considered a tax liability.
4. ITC claimed at the time of purchase:
-
- Yes: This rule will be applicable
Now check, Capital goods sold within 5 years:
- No: This rule will not be applicable
In this case, the GST charged on the selling price will be considered a tax liability.
1.Eligible ITC:
ITC can be claimed for the number of months it was used from the date of invoice till date of sale.
2. Computation of months:-
The months will be counted from the date of the invoice, not based on standard calendar months like January or March.
Example:-
If the date of purchase is 05-03-2023 then one month will not be March. Instead, it will be from 05-03-2023 to 04-04-2023.
3. Rounding off to months:
Suppose the total period is 2 months and 10 days. According to the rule, the time period is always rounded up to the next month. So, it will be considered as 3 months. Therefore, ITC can be claimed for 3 months.
1. Example:
- Date of purchase: 05-02-2023
- Date of sale: 24-04-2025
- Selling price: 1,00,000
- GST on sale: 18,000 @18%
- Total period: 26 Months & 20 days
- GST credit claimed: 50,000
- ITC can be claimed for 27 months (higher rounding off)
- of eligible ITC is 22,500 i.e. 50,000/60*27
- of reduced ITC is 27,500 (50,000 – 22,500).
As per this rule, total liability is 27,500 i.e. higher of 18,000 or 27,500.
4. Profit or loss on sale:
It does not matter whether capital goods are sold at a profit or loss. This rule will be applicable in both the cases.
5. Reporting in GSTR-1:-
As per the provisions, GST payable under this section should be reflected in GSTR-1 instead of reversal of ITC in Table-4B.
- Normally, tax on 1,00,000 would be 18,000 on sale of capital goods.
- But remaining ITC is 20,000 as per this rule (which is more than 18,000).
- So, as per Section 18(6), you have to pay the higher amount —20,000.
- Therefore, for GSTR-1 reporting, the turnover gets grossed up to 1,11,111 so that 18% of 1,11,111 = 20,000.
6. ITC reflect in GSTR-2B:
In GSTR-2B, the ITC reflected is 20,000. However, since the recipient has paid GST of only 18,000, they will be eligible to claim ITC only to the extent of 18,000, not 20,000.
7. Computation of aggregate turnover:
While computing turnover as per GST, the actual turnover of 1,00,000 will be considered in such cases, instead of 1,11,111. The supplier has reported this turnover solely for the purpose of discharging the GST liability.
8. Output liability or reversal of ITC:
GST payable computed under Section 18(6) must be included in your output-tax liability and reported in Form GSTR-1; it should not be shown as an ITC reversal in Table 4B of Form GSTR-3B.
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As per Section 17(5), Input Tax Credit is not available in cases where goods are lost due to fire, theft, or are destroyed.
In such cases, the entire ITC must be reversed, and this rule will not be applicable.
Dear Mr. Ashish, is the same rule of reversal of ITC applicable in case of capital goods totally destroyed in any accident.