When capital goods are sold, Section 18(6) of the GST Act and Rule 40(2) dictate that the GST payable is the higher of the tax levied on the transaction value or the input tax credit (ITC) reduced according to a specific rule. This rule allows for claiming 5% ITC per quarter (or part thereof) from the invoice date, applicable if ITC was initially claimed. If no ITC was claimed, the GST on the sale price is the liability. For goods sold within 20 quarters of purchase where ITC was claimed, this rule applies. The period for calculating quarters starts from the invoice date, not standard calendar quarters, and any part of a quarter is rounded up. For instance, if purchased on 05-02-2023 and sold on 24-04-2025 (8 quarters, 2 months, 20 days), ITC is calculated for 9 quarters. The profit or loss on sale is irrelevant. This payable GST is reported as output tax in GSTR-1, requiring a grossed-up turnover for reporting purposes, although the actual turnover is used for aggregate turnover computation. The buyer can claim ITC only to the extent of the GST paid by them, even if GSTR-2B reflects a higher amount.
1. Section 18(6):-
On sale of capital goods, GST payable should be the higher of:
GST levied on the transaction value of capital goods Or ITC amount calculated as per the prescribed rule (Reduced ITC)
2. Rule 40(2):-
a. ITC can be claimed as per this rule is 5% per quarter or part thereof from the date of invoice.
b. ITC claimed at the time of purchase:
-
- Yes: This rule will be applicable
- No: This rule will not be applicable
c. ITC claimed at the time of purchase:
-
- Yes: This rule will be applicable
Now check, Capital goods sold within 20 quarters:
-
- Yes: This rule will be applicable
- No: This rule will not be applicable
d. 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.
e. ITC claimed at the time of purchase:
-
- Yes: This rule will be applicable
Now check, Capital goods sold within 20 quarters:
-
- No: This rule will not be applicable
In this case, the GST charged on the selling price will be considered a tax liability.
f. Eligible ITC:
Only 5% ITC can be claimed for each quarter or part thereof from the date of invoice.
g. Computation of quarter:-
The quarter will be counted from the date of the invoice, not based on standard calendar quarters like January–March or April–June.
Example:-
If the date of purchase is 05-02-2023 then one quarter will not be from Jan to March. Instead, it will be from 05-02-2023 to 04-05 -2023.
Rounding off to quarter:
Suppose the total period is 2 quarters, 1 month, and 10 days. According to the rule, the time period is always rounded up to the next quarter. So, it will be considered as 3 quarters. Therefore, ITC can be claimed for 3 quarters.
3. 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: 8 Quarters 2 Months 20 days
- GST credit claimed: 50,000
- ITC can be claimed for 9 quarters (higher rounding off)
- of eligible ITC is 22,500 i.e. 50,000 * 5% * 9 quarters
- 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 reflects 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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