This article explores the provisions under Section 18(6) of the CGST Act, 2017, and related rules governing ITC reversal and GST impacts on capital goods transactions.
The Goods and Services Tax (GST) is introduced in India from 1st July 2017, it has various features one of such feature is ITC i.e. input tax credit. This simply means that purchaser will get benefit of tax paid during purchases for setting off liability of tax payable on sales, but it has some restrictions and conditions.
There are various scenarios where ITC need to be reversed as per provisions of GST Act 2017. Today we will discuss ITC reversal and other GST impact on sale of Capital Goods
The relevant provisions of law are section 18(6) of the CGST Act, 2017; rule 40(2) and 44(6) of the CGST Rule, 2017 as amended
Section 18(6) is read as follows: –
“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:
Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.”
Rule 40(2) is read as follows: –
“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”
Rule 44(6) is read as follows: –
“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) is read as “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“
It is clearly appearing from above that Rule 40(2) and 44(6) although talks about same thing i.e. determination of ITC in case of capital goods for purpose of section 18(6), but both provides different ways. Rule 40(2) provides for fixed 5% deduction of ITC for every quarter or part thereof where as rule 44(6) provides for ITC deduction based on useful life of asset considering asset’s life as 5 years
On analyzing section 18(6) it appears that, in case of sale of capital asset one needs pay higher of tax on transaction value or reversal of ITC as per prescribed rules
As we analyzed above, both rules are valid and provides for different ways and hence value from both rules may come different hence in such case it is advisable to tax payer to follow the rule which provides more revenue to the government.
Conclusion: Navigating GST on the sale of capital goods requires a thorough understanding of ITC reversal rules under Section 18(6) of the CGST Act, 2017, and Rules 40(2) and 44(6) of the CGST Rules, 2017. Taxpayers must carefully calculate ITC adjustments, considering both fixed percentage deductions and the asset’s useful life. Adhering to the rule that results in higher tax revenue ensures compliance and optimizes tax liability management.
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