Reversal of ITC on Supply of Capital Assets under GST Regime

Since inception of GST there are various contrary views and ambiguity on numerous provisions of GST law and practical difficulty is being faced by taxpayer in figuring out the exact mechanism to be followed. One such ambiguous provision in with respect to sale of Capital goods within five years of its procurement and reversal of Input tax credit thereon (if any).

Here I have summarized few commonly asked and arguable doubts which may be faced by Compliance team and my view point on the same:

Q 1: Which section and rules under GST law governs the provision of Reversal of ITC on sale of Capital goods?

View: As per Section 18(6) of CGST Act,

“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.”

In CGST Rules, there are two provisions which refer to the 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 the CGST Rules which states that input tax credit in the case of supply of capital goods and plant and machinery shall be calculated by reducing five percentage point for every quarter or part thereof from the date of issue of invoice.

Second method is prescribed under Rule 44(6) read with Rule 44(1)(b) of the CGST Rules which 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 tend to produce different results when quantum of ITC reversal is computed. Just check the same with help of below example:

So as we can see from the above example there is difference in reversal amount computed as per both the rules and suitable clarification should be given by government regarding which rule to be followed by taxpayer.

As per author’s view, in absence of any clarity in this regard, taxpayers should follow rule 40(2) which is more legitimate.

Q 2: What should be the invoice value of sale of capital goods and what is the disclosure requirements in GST Return?

View:  Let’s take the above example only, if Sales value of the assets is Rs. 9,00,000 and GST on the same should be charged @18% will come out to Rs. 1,62,000.

However as seen from Rule 40(2), ITC reversal is required of Rs. 1,75,000.

So as per section 18(6), GST should be disbursed at the rate of higher of both of the above i.e. Rs. 1,75,000 and accordingly by back calculating the same, Taxable value will be Rs. 175000/18% = Rs. 9,72,222.

So here actual monetary burden is increased for the customer who is purchasing this Capital asset.

However one school of thought is that invoice can be raised to customer for only Rs. 9,00,000 as Taxable value + 18% GST on the same and accordingly the same will be reported in GSTR 1 also.

Further excess ITC claimed of Rs. 13,000 (Rs. 175000- Rs. 162000) can be reversed while making payment through GSTR 3B and will be shown under “Other ITC reversal’ in GSTR 3B. This will not lead to extra burden on customer on account of section 18(6).

As per author’s view, taxpayers should follow first approach as mentioned above by changing taxable value and accordingly raising invoice on customers.

Q 3: Whether provision of section 18(6) applicable on services also which are capitalized in the books of accounts?

View: As per section 18(6) which is reproduces below:

“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:

Query may come in the mind that since section 18(6) specifies word “Capital goods”, so one need to compute surrender of  ITC on only capital goods and not on the services (like, Work contract services) which were capitalized in construction of the said capital assets.

Since the provision contained in Rule 43 (Proportionate reversal of ITC in case of assets used for taxable as well as exempted supplies) is also coveres only goods as specifically mentioned there, there might be intention of the law maker to exclude services from the calculation of reversal of ITC for the purpose of section 18(6) also.

However as per author’s view, both goods as well services which are capitalized and used for constructing that asset which we intend to sale now, should be consider for the purpose of section 18(6).

Q 4: How to compute reversal amount in case of Capital goods on which Rule 43 is being applied?

View: As per rule 43 of CGST Rules, if any capital goods is used both for taxable and exempted supplies, then ITC needs to be availed fully and surrender the same up to next 60 months as per mechanism prescribed under rule 43(d) to 43(g).

Now the question is if such capital goods is being proposed to be sold by taxapayer after certain period of its uses then how to compute the value for the purpose under rule 40(2) as required for the calculation of section 18(6).

Here as per author’s view, ITC availed will be taken as net ITC availed as on date i.e. (Total ITC availed minus ITC reversed as per Rule 43) and 5% point to be applied on such net ITC availed after reducing reversal made under rule 43 till date of such computation.