ITC Reversal on Sale of Used Capital Goods

Many a time we have seen that people buys capital goods, take its Input Tax Credit (ITC) and then sale the asset after sometime. Now the question here is whether there is any need to reverse the ITC already taken at the time of purchase? In this article we will understand the answer of this question as per SECTION 18(6) OF CGST ACT, 2017 READ WITH PRESCRIBED RULES.

First of all, we should know that as per GST, the life of any capital goods is considered as 5 years i.e. 60 months.

On sale of any capital goods, the liability to pay GST arises. This liability is calculated as follows :-

Liability will be higher of the following :-

1. ITC Booked on purchase – monthly proportionate ITC for the used life*

*We can also take 5% per quarter or part thereof instead of monthly proportionate (Amount may vary in both the methods).

2. Tax liability on transaction value i.e. sale value

HOW TO CALCULATE USED LIFE OF THE CAPITAL GOODS?

• In case of monthly proportionate method:-

To calculate the no. of months for which the capital goods has been used we need to calculate the time period for which it is used and then convert it into months. A period of less than a month shall be considered as a complete month.

For Example: Miss Ravita purchased a machine on 10.01.2019 and sold the machine on 25.05.2021. Calculate the used life in months.

Solution: Miss Ravita used the machinery for 2 years 4 months and 16 days.

Now convert this period into months and part of the month shall be considered as one month.

Hence used life will be 29 months.

• In case of quarterly calculation:-

First of all we should know that the months of the quarter are fixed in GST. Following are considered as quarters in GST:-

Quarter 1 – January to March

Quarter 2 – April to June

Quarter 3 – July to September

Quarter 4 – October to December

A part of the quarter shall be considered as complete quarter.

For Example: Miss Ravita purchased a machine on 12.08.2018 and sold the machine on 11.12.2021. Calculate the used life in quarters.

Solution: No. of quarters in 2018-19 = 3(Jul-Sep, Oct-Dec, Jan-Mar)

No. of quarters in 2019-20 = 4(April-Jun, Jul-Sep, Oct-Dec, Jan-Mar)

No. of quarters in 2020-21 = 4(April-Jun, Jul-Sep, Oct-Dec, Jan-Mar)

No. of quarters in 2021-22 = 3(April-Jun, Jul-Sep, Oct-Dec)

Hence used life will be 14 quarters.

Now let’s understand the whole concept with an example,

Question: Mr. Avinash is a registered person under GST in Haryana. He bought a plant & machinery of Rs.531000 (450000+81000 GST@18%) on 01.01.2018 and booked the ITC. On 24.01.2021, he sold the machine for Rs. 275000. Calculate his liability to pay GST on sale.

Solution:

MONTHLY PROPORTIONATE METHOD

The asset is used for 3 years and 24 days which constitute 37 months for our calculation.

GST liability will be higher of the two :-

(1)  81000 – 81000*37months/60months = 31050

(2)  275000*18% = 49500

Hence liability to pay GST is 49500.

QUARTER WISE METHOD

    No. of qtr. In 2017-18 = 1(Jan-Mar)

No. of qtr. In 2018-19 = 4(All qtrs.)

No. of qtr. In 2019-20 = 4(All qtrs.)

No. of qtr. In 2020-21 = 4(All qtrs.)

GST liability will be higher of the two :-

(1)  81000 –5%*13quarters = 28350

(2)  275000*18% = 49500

Hence liability to pay GST is 49500. 

Note:- On sale of refractory bricks, moulds and dies, jigs and fixtures as scrap, tax liability will be calculated on transaction value i.e. sale value only since they are only for one time use or for consumption in the manufacturing  process completely.