When capital goods on which Input tax credit (ITC) was claimed are sold under the Goods and Services Tax (GST) regime, the tax liability is determined based on specific rules, primarily Rule 40(2) and Rule 44(6). Both rules apply when ITC has been availed on the purchase of the capital goods. The tax payable at the time of sale is the higher of the GST calculated on the transaction value (selling price) or an amount representing the ‘Reduced ITC’. This Reduced ITC is essentially the proportionate ITC relatable to the remaining useful life of the asset.
The key difference between Rule 40(2) and Rule 44(6) lies in the method used to calculate this Reduced ITC. Rule 40(2) stipulates that the ITC amount for calculating this component is reduced by five percent for every quarter or part of a quarter from the date of the invoice for the capital goods. In contrast, Rule 44(6) calculates the ITC based on the useful life of the capital goods being five years (sixty months), effectively requiring a proportionate reversal of ITC based on the number of months the asset has been used. While both rules aim to recover ITC proportionate to the unused life, Rule 40(2) uses a quarterly reduction mechanism (5% per quarter or part), whereas Rule 44(6) implies a calculation based on the 5-year/60-month useful life. Both rules also specify that if the capital goods are sold after five years (20 quarters or 60 months), these specific calculations for Reduced ITC do not apply, and GST is simply payable on the selling price. If capital goods are lost, stolen, or destroyed, neither rule applies, and the full ITC must be reversed as per Section 17(5).
Difference between Rule: 40(2) & Rule: 44(6) GST on sale of capital goods:
| S. No. | Particulars | Rule: 40(2) | Rule: 44(6) |
| 1. | Applicability | At the time of sale of capital goods | At the time of sale of capital goods |
| 2. | ITC claimed on purchase | This rule will apply | This rule will apply |
| 3. | ITC not claimed on purchase | This rule will not apply | This rule will not apply |
| 4. | Profit or loss on the sale | The applicability of rule is not affected by profit or loss | The applicability of rule is not affected by profit or loss |
| 5. | Valuation | Tax liability will be the higher of “GST on the selling price” or “Reduced ITC” | Tax liability will be the higher of “GST on the selling price” or “Reduced ITC” |
| 6. | Eligible ITC for supplier | 5% per quarter or part thereof from the date of invoice | ITC shall be computed based on a useful life of 5 years |
| 7. | GSTR-1 reporting | Tax liability should be reported in GSTR-1 instead of reversing the ITC | Tax liability should be reported in GSTR-1 instead of reversing the ITC |
| 8. | Capital goods sold after specified period | If ITC claimed & capital goods sold after 20 quarters from the date of purchase then this rule will not be applicable | If ITC claimed & capital goods sold after 60 months from the date of purchase then this rule will not be applicable |
| 9. | Capital goods sold within specified period | If ITC claimed & capital goods sold within 20 quarters from the date of purchase then this rule will be applicable | If ITC claimed & capital goods sold within 60 months from the date of purchase then this rule will be applicable |
| 10. | Non-applicability of rule | In that case, GST liability will be the GST charged on the selling price | In that case, GST liability will be the GST charged on the selling price |
| 11. | Rounding up | The total number of quarters will be rounded up | The total number of months will be rounded up |
| 12. | Turnover of the seller | Turnover shall be computed based on the actual selling price | Turnover shall be computed based on the actual selling price. |
| 13. | ITC in the books of buyer | The buyer shall be eligible to claim Input Tax Credit only to the extent of tax actually charged by the supplier | The buyer shall be eligible to claim Input Tax Credit only to the extent of tax actually charged by the supplier |
| 14. | Capital goods sold with consideration | ||
| a. | ITC availed on purchase | This rule will apply | This rule will apply |
| b. | ITC not availed on purchase | This rule will not apply | This rule will not apply |
| 15. | Capital goods sold without consideration | ||
| a. | ITC availed on purchase | This rule will apply | This rule will apply |
| b. | ITC not availed on purchase | This rule will not apply | This rule will not apply |
| 16. | Assets lost by fire, theft or destroyed | This rule will not apply | This rule will not apply |
| 17. | Assets lost by fire, theft or destroyed | The full ITC shall be reversed as per Sec 17(5) | The full ITC shall be reversed as per Sec 17(5) |
Please refer to this article for Rule 40(2):
https://taxguru.in/goods-and-service-tax/gst-sale-capital-goods-section-18-6-rule-40-2.html
Please refer to this article for Rule 44(6):
https://taxguru.in/goods-and-service-tax/gst-sale-capital-goods-itc-claimed.html
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