Sale of Capital Goods under GST: When to Apply Section 18(4) & 18(6)

Under GST, confusion often arises because two different situations involving capital goods are mixed up. One situation is where a normal taxpayer opts for the composition scheme. The other is where a normal taxpayer sells capital goods on which Input Tax Credit (ITC) had been claimed earlier.

These two situations are governed by different provisions. If a normal taxpayer opts for composition, Section 18(4) read with Rule 44(1) applies. If a normal taxpayer sells capital goods on which ITC was availed, Section 18(6) read with Rule 40(2) and Rule 44(6) applies.

Once this distinction is clearly understood, the law becomes much easier to read and apply in practice.

Why this distinction matters

In practice, many readers treat all capital goods cases as if they involve a simple ITC reversal. That is not correct. A case of shifting from the regular scheme to composition is legally different from a case of actual supply of capital goods.

The first situation concerns reversal of credit on stock and capital goods lying with the taxpayer. The second concerns payment of tax when capital goods are supplied. That is why both situations should be analysed separately.

Situation 1: Normal taxpayer opting for composition

Where a normal taxpayer opts for the composition scheme, Section 18(4) comes into play. In such a case, the taxpayer is required to pay an amount equal to the ITC involved in:

• Inputs held in stock,
• Inputs contained in semi-finished goods,
• Inputs contained in finished goods, and
• Capital goods held in stock,

as on the day immediately preceding the date of opting for composition.

For capital goods, the method of computation is laid down in Rule 44(1)(b). This rule provides that the credit attributable to the remaining useful life in months is to be computed on a pro-rata basis, taking the useful life of capital goods as 5 years or 60 months.

So, in simple terms, where a person exits the regular scheme and enters composition, the law requires reversal / payment back of ITC on stock and capital goods. In such a case, the correct legal reference is:

Section 18(4) + Rule 44(1).

Situation 2: Normal taxpayer selling capital goods

Now consider a different case. A normal taxpayer continues under the regular scheme, but sells machinery, equipment, furniture or any other capital goods on which ITC had been claimed earlier. In that situation, Section 18(6) applies.

Section 18(6) provides that where capital goods or plant and machinery, on which ITC has been taken, are supplied, the registered person shall pay an amount equal to:

• The ITC taken on such capital goods, reduced by the prescribed percentage points, or
• The tax on the transaction value of such capital goods,

whichever is higher.

The reduction mechanism is provided in Rule 40(2), which prescribes a reduction of 5 percentage points for every quarter or part thereof from the date of invoice. At the same time, Rule 44(6) states that for the purposes of Section 18(6), the ITC amount relating to capital goods shall be determined in the same manner as Rule 44(1)(b), that is, on the basis of the remaining useful life out of 60 months.

Further, where the amount determined under Rule 44(6) is more than the tax on the transaction value, that amount becomes part of the output tax liability and is to be reported in GSTR-1.

So, in a sale of capital goods case, the correct legal reference is:

Section 18(6) + Rule 40(2) + Rule 44(6).

Simple comparison

This table captures the issue in the clearest possible way. One provision applies when the taxpayer changes scheme. The other applies when the taxpayer actually supplies capital goods.

Example 1: Sale within first year under Rule 40(2)

To understand the second situation better, take a case where a machine is purchased in July 2023 for ₹1,00,000 plus GST of 18%. The taxpayer avails ITC of ₹18,000 and later sells the machine in May 2024 for ₹70,000, with GST rate again being 18%.

Facts

Quarter-wise working

Under Rule 40(2), even a part of a quarter is treated as a full quarter for the purpose of reduction.

Reduced ITC under Rule 40(2)

GST on transaction value

Amount payable under Section 18(6)

Thus, even though GST on the sale value works out to ₹12,600, the amount payable under Section 18(6) becomes ₹14,400, being the higher figure.

Example 2: Same facts under Rule 44(6)

Using the same facts, the amount may also be looked at through Rule 44(6), which borrows the remaining useful life method from Rule 44(1)(b).

For illustration, assume the machine has been used for 10 full months, from July 2023 to April 2024, and the notional useful life is 60 months.

Facts

Months of use and remaining life

ITC attributable to remaining useful life

Under Rule 44(1)(b), as adopted by Rule 44(6), the ITC attributable to remaining life is worked out on a pro-rata basis over 60 months.

Comparison with GST on transaction value

Under this method, the payable amount works out to ₹15,000, which is higher than the tax on transaction value. As per the proviso to Rule 44(6), this higher amount forms part of the output tax liability and is to be reported in GSTR-1.

What if no ITC was ever availed on the capital goods?

Section 18(6) is attracted only when capital goods or plant and machinery are supplied and input tax credit has been taken on those goods. If no ITC was ever availed on the capital goods, Section 18(6) and the related Rule 40(2) / Rule 44(6) working do not come into play.

In such cases, two broad possibilities usually arise:

• If the capital goods are sold for consideration and no ITC was taken, the transaction is treated as a normal taxable supply, and GST is payable only on the transaction value, at the applicable rate, without doing any “higher of reduced ITC vs transaction value” comparison.
• If the capital goods are disposed of without consideration and no ITC was taken, then the deeming fiction in Schedule I (permanent transfer or disposal of business assets where ITC has been availed) does not apply. In many such cases, there may be no GST liability because the basic condition of ITC having been availed is not satisfied.

This is another reason why it is important first to identify whether ITC was taken on the capital goods before jumping into Section 18(6) computations.

Practical takeaway

If the discussion is to remain clear and result-specific, the article should not mix both situations in one flow. The correct and simple approach is:

• If a normal taxpayer opts for composition, apply Section 18(4) read with Rule 44(1).
• If a normal taxpayer sells capital goods on which ITC was claimed, apply Section 18(6) read with Rule 40(2) and Rule 44(6).

This framing is legally cleaner, easier to understand and far less confusing for readers, especially for those looking for a practical conclusion rather than a highly technical discussion.

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Disclaimer: The above discussion is based on the statutory provisions referred to above and is intended for general academic and professional understanding. Readers are advised to seek specific professional advice before taking any decision in actual cases.