Definition of Capital good under GST
As per section 2(19) of CGST act, 2017 ‘capital goods’ means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
GST treatment on Disposal of Capital Asset:
If ITC is not claimed on capital goods:
Case 1: Asset is disposed off free of cost i.e. without consideration
If ITC has not been taken and asset is disposed off free of cost then it would not be treated as supply under GST as it doesn’t involve consideration and further it is also not supply as per Schedule II.
Case 2: Asset is disposed off for consideration
The consideration charged would be treated as supply as per section 7(1)(a) of the CGST act 2017 and tax has to be charged at applicable rate.
If ITC is claimed on capital goods:
In case of sale of capital goods under GST, the tax liability for the same has to be calculated in a special manner. The treatment of Capital goods under GST is covered under the below sections:
1. Section 18 (6) of the CGST Act
2. Schedule I of the CGST Act
3. Schedule II of the CGST Act
4. Rule 44 of the CGST Rules
Section 18(6) of the CGST act simply states that in case of sale of capital goods, any credit taken in respect of capital goods has to be reversed as calculated as per Rule 44 and added to the output tax liability for the month. The resulting amount of reversal will be the tax liability on the sale of capital goods or the tax on the transaction value of capital goods, whichever is higher.
Schedule II determines the situations where the sale of capital goods is a taxable event. According to Schedule II the following conditions should be satisfied for sale of capital goods to be a taxable event
1. The goods should form part of business assets
2. They are so transferred that they no longer form part of business.
3. They are transferred under the instructions of the person carrying on the business.
Note:- The assets should be sold by the person carrying on the business. Hence in case of calamity like fire, accident, theft there will be no liability to pay tax.
Schedule I states that permanent disposal of assets even if made without consideration has to be treated as supply where ITC has been availed on such assets. This means that even writing off of capital goods will be treated as a taxable event.
The above provisions are mentioned in the CGST act. For valuation purposes we have to look at the rules for sale of capital goods. Rule 44 contains the procedure for sale of capital goods. This is where the provision gets very complicated and requires special attention.
Rule 44 states that ITC taken on capital goods shall have to be reversed in case of sale on a pro rata basis where the useful life of any capital goods will be taken as 5 years.
The rule is explained via an example below:
Suppose the ITC taken on an Asset of Rs 50000 is 50000*18% i.e. Rs 9000 and actual sale value is Rs 4000. Tax paid on actual sale value = 4000*18%= Rs 720. The ITC to be reversed will be as below:
Section 18(6) of the CGST act 2017 states:
“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”
Schedule I of the CGST act 2017 states:
“1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets”
Schedule II of the CGST act 2017 states:
“4. Transfer of business assets
(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;
(b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services;
(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—
(i) the business is transferred as a going concern to another person; or
(ii) the business is carried on by a personal representative who is deemed to be a taxable person”
Rule 44 of the CGST Rules 2017:
Manner of reversal of credit under special circumstances.-
(1) The amount of input tax credit relating to inputs held in stock, inputs contained in semi-finished and finished goods held in stock, and capital goods held in stock shall, for the purposes of subsection (4) of section 18 or sub-section (5) of section 29, be determined in the following manner, namely,- (a) for inputs held in stock and inputs contained in semi-finished and finished goods held in stock, the input tax credit shall be calculated proportionately on the basis of the corresponding invoices on which credit had been availed by the registered taxable person on such inputs;
(b) 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.
Illustration: Capital goods have been in use for 4 years, 6 month and 15 days. The useful remaining life in months= 5 months ignoring a part of the month Input tax credit taken on such capital goods= C Input tax credit attributable to remaining useful life= C multiplied by 5/60
(2) The amount, as specified in sub-rule (1) shall be determined separately for input tax credit of central tax, State tax, Union territory tax and integrated tax.
(3) Where the tax invoices related to the inputs held in stock are not available, the registered person shall estimate the amount under sub-rule (1) based on the prevailing market price of the goods on the effective date of the occurrence of any of the events specified in sub-section (4) of section 18 or, as the case may be, sub-section (5) of section 29.
(4) The amount determined under sub-rule (1) shall form part of the output tax liability of the registered person and the details of the amount shall be furnished in FORM GST ITC-03, where such amount relates to any event specified in sub-section (4) of section 18 and in FORM GSTR-10, where such amount relates to the cancellation of registration.
(5) The details furnished in accordance with sub-rule (3) shall be duly certified by a practicing chartered accountant or cost accountant.
(6) 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:
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.
By Jatin Bansal