This article is penned down to enlighten the implications in respect of capital goods that are lost, stolen, destroyed or disposed by way of gift and sale of capital goods under Goods and Services Tax Act, 2017.
♦ Meaning of Capital Goods
♦ Meaning of Supply in context to “Transfer/Disposal of Capital Goods”
♦ GST applicability on sale of Capital Goods
♦ Sec 18 (6) of CGST Act- in case of supply of capital goods
♦ Rule 44 (6) vs Rule 40 (2) of CGST Rules, 2017 and
♦ GST implications in respect of Capital Goods that are lost, stolen, destroyed or disposed by way of Gift.
Before analysing GST implications in respect of capital goods, one must understand the term “Capital Goods”.
Meaning of Capital Goods
The definition of capital goods is defined under Section 2(19) of the CGST Act, 2017 which is reproduced below:
Capital Goods means:
For the purpose of understanding the term capital goods, one must also refer the definition of Goods first which is defined under section 2 (52) of the CGST Act, 2017. As per Sec 2 (52), “goods” means:
Whether all the following assets are “capital goods”?
In light of the above two definition, it is concluded that the immovable property (other than plant and machinery), trademarks, customized software would not qualify as capital goods under this act even though these are capitalized in the books of the accounts.
Moving further, as in GST the taxable event is supply, so for anything liable to GST must qualify as “Supply” first. Let us understand Section 7 (1) of the CGST Act, 2017 which is related to the term “Supply”.
Section 7 of the CGST Act (Amended by the CGST Amendment Act, 2018 w.e.f. 01st July 2017) is reproduced below:
7. (1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business; and
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II. (Removed w.e.f. 01-07-2017)
(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.” (Inserted w.e.f. 01-07-2017)
Prior to this amendment, the activities mentioned in Schedule II of the Act, were de-facto considered as supply in the same way as the activities mentioned in Schedule I of the Act.
Let us understand Schedule I CGST Act, Para 1 which talks about ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION
Para 1: Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
For invocation of above provision three conditions to be satisfied:
⇒ Permanent transfer or disposal
⇒ Business assets
⇒ ITC has been availed on such assets
The Para regarding ‘assets of business’, that may be considered either current assets or fixed assets. Therefore, particular ‘assets of business’ para, will be applied to both either ‘capital goods’ or other ‘goods”. However, since our topic is related with capital goods, we will confine ourselves to that only.
A retrospective amendment in Section 7 clarify that the purpose of Schedule II was only the classification of a supply into a supply of good or service. Schedule II, Para 4 (a) which is relevant to our topic is reproduced below:
Schedule II CGST Act, Para 4(a):
Transfer of business assets will be treated as supply of Goods:
a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;
It is worthwhile to note that, in the light of the amendment to the definition of Supply as discussed above, Schedule II is not a charging section so can’t be read in isolation. Schedule II is relevant only for the purpose of classification of a supply into a supply of good or a supply of service.
For a transaction to be a supply, the essential criteria to be satisfied in the involvement of consideration, with the only exceptions being the activities mentioned in Schedule I and import of services. Thus, where no consideration is involved, and the activity is neither specified in Schedule I nor in the nature of import of services, the activity shall not be a supply under the provisions of this Act.
The bare analysis of Section 7 and the entries related to capital goods to Schedule I and Schedule II seems simple but when we delve deeper into the definition, one question arises i.e., Will Goods lost, destroyed or stolen which are not under or by the direction of the person carrying on the business be considered as permanent transfer or disposal of capital goods as per Entry 1 to the Schedule I ?
Well, one school of thought opines that capital goods destroyed due to fire, lost and stolen is not covered under Schedule I of the CGST Act thereby this activity can’t be termed as supply. Another school of thought believe that the phrase by or under the direction is missing in First entry to Schedule I to the act. therefore, the goods disposed of due to fire or lost or stolen is also covered under this schedule which in turn wouldn’t qualify as supply, no matter transfer/Disposal is intentional or unintentional.
For the sake of understanding, we will discuss the GST implication on transfer/disposal of capital goods into the following two parts:
1. When Input Tax Credit was availed whether consideration charged or not and
2. When Input Tax Credit was not availed whether consideration charged or not.
1. When Input tax credit was not availed
GST implications on capital goods when input tax credit was not availed depend upon the fact whether consideration was charged for the transfer of the goods or not.
Where CONSIDERATION is involved and ITC may not be availed due to restriction u/s 17 (5) of the CGST Act, 2017, the transaction shall fall within the ambit of supply as per Section 7 (1) (a) and hence, GST shall be chargeable.
And if NO consideration is involved and the activity or transaction neither specified in schedule I nor an import of service then the activity shall not be a supply within the four corners of the law.
2. When Input tax credit was availed
Where CONSIDERATION is involved then the transaction shall fall within the ambit of supply and hence, GST shall be chargeable.
And in case of NO consideration then it is important to recall that the activities mentioned in Schedule I are de-facto considered as supply even if the activities are carried out without consideration. Hence, any permanent transfer of capital assets on which ITC has been availed shall be considered as supply even if the same is carried out without any consideration.
Now we came to know that when a particular transaction or activity becomes supply and liable to GST in both the cases when input tax credit is availed and input tax credit is not availed whether consideration is involved or not. It can be settled now that when transaction or activity becomes supply, there is an applicability of GST. Now we will analyse how will GST be paid and is there any specific treatment related to the Input tax credit.
Value on which GST shall be paid in case of supply of capital goods when ITC has been taken
When the activity or transaction becomes supply and ITC has been availed then the next step is to ascertain the value and calculate the tax to be paid which is explained below:
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.
In CGST Rules, there are two provisions which refer to the above-mentioned Section 18(6) and prescribes the method for calculating the input tax credit for the said purpose. First method is prescribed under Rule 40(2) of CGST Rules, 2017, ITC on credit in the case of supply of capital goods and plant and machinery shall be reduced by the ITC at five percentage point for every quarter or part thereof, from the date of issue of invoice for such capital goods or plant and machinery.
Further Rule 44(6) read with Rule 44(1)(b) of the CGST Rules also prescribes the method of determining an amount for the purpose of Section 18(6), by stating that input tax credit involved in the remaining useful life in months shall be computed on pro rata basis, taking useful life as five years.
These two provisions bring two different dishes on a plate. Let us understand this issue with the help of the following example.
Suppose, Mr. A sold his machinery for Rs. 1,26,000/- (inclusive of GST @18% – Rs. 19,220/-) on 11.05.2019 which he purchased on 01.07.2017 for Rs. 2,15,000/- (inclusive of Rs. 32,797/- GST @ 18%).
As per Section 18(6) of the CGST Act, Mr. A has to pay an amount equivalent to higher of the following:
a. an amount equal to the GST levied on transaction value on supply (sale) of the machinery, that is of Rs. 19,220/-, or
b. An amount of input tax credit as reduced by such percentage point as prescribed under the rules:
From the above illustration, it can be understood that the two provisions produce two different results when quantum of ITC reversal is computed. As per Rule 40(2), ₹19,678 shall be payable on the other hand Rs. 20,225 shall be payable according to Rule44 (6). But Rule 44 (6) seems more legitimate in order to avoid any dispute in future with the department.
However, it is desirable that appropriate clarification is issued by the CBIC in order to obviate ambiguities.
Rule 44(6) CGST Rules:
It provides that the amount of input tax credit for the purposes of sub-section (6) of section 18 relating to capital goods shall be computed on pro-rata basis, taking the useful life as five years. The amount shall be determined separately for input tax credit of central tax, State tax, Union territory tax and integrated tax.
Provided that where the amount so determined is more than the tax determined on the transaction value of the capital goods, the amount determined shall form part of the output tax liability and the same shall be furnished in FORM GSTR-1.
Value on which GST shall be paid when ITC has not been taken
As discussed, in case of transfer of capital goods for consideration on which ITC has not been availed shall be considered as supply under the Act and Tax is to be paid on the transaction value itself as amount of ITC availed is Zero.
Comment: Sec 18 (6) of the CGST Act, 2017 triggers only there is a SUPPLY of the “capital goods” and ITC has been availed on it.
For instance, in case of sale of motor vehicle where ITC has not been taken due to a restriction u/s 17 (5) then the said section will not applicable here.
Valuation in case of sale of Motor Vehicle
(Where Input Tax Credit is not taken)
There is a margin scheme concept under GST which was implemented for a dealer dealing in second hand goods who does not claim input tax credit on the goods purchased and who sells the goods as such or after minor processing which does not change the nature of the goods. The margin scheme was made applicable to all taxpayers on the sale of motor vehicle held as capital asset and where input tax credit has been availed vide Notification 8/2018- Central Tax (Rate) dated 25 January 2018.
In case of a registered person who has claimed depreciation under section 32 of the Income-Tax Act, 1961 (43 of 1961) on the said goods, the value that represents the margin of the supplier shall be the difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply, and where the margin of such supply is negative, it shall be ignored; and
(ii) in any other case, the value that represents the margin of supplier shall be, the difference between the selling price and the purchase price and where such margin is negative, it shall be ignored.
Please also refer our previous article on the topic “Most Untouched provision under GST Audit” for analysing correct invoicing method u/s 18 (6) of the CGST Act, 2017.
The author is a Practicing Chartered Accountant offers a plethora of services such as GST, GST refunds, Income Tax, MSME, ROC and other tax related matters and can be reached at email@example.com.
Disclaimer: The views presented are in personal and generic form and not as a legal advice. Users of this information are expected to refer to the relevant existing provisions of the applicable laws.