Sale of Capital Goods under GST regime in India

The implications of GST on the sale of capital goods is one of the most baffling subjects. Many questions arise in the minds of taxpayers and professionals such as:

• GST implications on capital goods that are bought under the erstwhile indirect taxes regime;
• GST implications in respect of capital goods that are lost, stolen, destroyed or disposed of by way of gift;
• Applicability of margin scheme on the sale of capital goods;
• GST implications on the sale of those capital goods whose ITC is not allowed under the provisions of Section 17(5) of the CGST Act, 2017 (‘Act’);

The Article below summarizes the answers to the aforesaid questions while broadly dividing the tax implications based on whether input tax credit on capital goods was availed or not.

1) When input tax credit was availed

Input tax credit is allowed under the Act when goods are used in the course or the furtherance of business. Hence, logically, when capital goods, instead of being used for business, are disposed of by means of sale or any other means, input tax credit earlier availed should not be eligible.

The same logic is given effect in the Act by means of the First entry to Schedule I of the Act:

‘Permanent transfer or disposal of business assets where input tax credit has been availed on such assets’

At this juncture, 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.

2) When input tax credit was NOT availed

2.1 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, the transaction shall fall within the ambit of supply and hence, GST shall be chargeable.

2.2 The case where no consideration is involved must be discussed in the light of the amendment to the definition of Supply (Section 7 of the Act) made by the CGST Amendment Act, 2018. Prior to the 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. However, the CGST Amendment Act, 2018 made a retrospective amendment clarifying that the purpose of Schedule II was only classification of a supply into a supply of good or 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 the Act.

The discussion of the amendment is in the light of provisions of Para 4(a) of Schedule II of the Act, which are relevant for the purpose of capital goods. As per Para 4(a) of Schedule II of the Act, transfer of business assets shall 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’

A bare reading of the above gives an interpretation that, for invocation of the above provisions, three conditions must be satisfied:

• Any goods forming a part of business assets
• Transferred or disposed off so as no longer to form part of business assets
• by or under the directions of the person carrying on the business

The above provisions do away with the requirement of consideration for a transaction to be supply of goods. However, it is pertinent to note that, in the light of the amendment to the definition of Supply as discussed above, Schedule II cannot 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 requirement of consideration is a sine-qua-non except in the case of import of services and activities mentioned in Schedule I. Therefore, in the absence of consideration and where no ITC has been availed, sale of capital goods shall not be a supply in accordance with the provisions of Section 7 of the Act and hence, GST shall not be chargeable.

The above discussion can be concluded as follows:

• Prior to the amendment, if any transfer of capital assets was made under the direction of the person (thus, excluding cases where goods are lost, destroyed by fire, etc), the transaction was a supply under the provision of the Act, whether or not consideration was involved.
• However, after the amendment, the requirement of consideration is must. Therefore, it would be right to conclude that where no ITC has been availed, the transfer of capital goods without consideration shall not be a supply and hence no GST should be chargeable.

3) Value on which GST shall be paid

Once, it has been determined that GST shall be payable on the transfer of capital goods, the next step is to ascertain the value and calculate the tax to be paid. The same is explained below:

3.1 Where ITC has been availed

The value on which GST shall be paid in case of transfer of those capital goods on which input tax credit has been availed is higher of the following:

• An amount equal to ITC attributable to the remaining life of the asset assuming the life of the asset to be 5 years (‘AMOUNT’). This amount shall be separately computed for central tax, state tax and integrated tax. The procedure is illustrated below:

Illustration:

Capital goods have been in use for 4 years, 6 months and 15 days.

The useful life remaining in months= 5 months ignoring a part of the month Input tax credit taken on such capital goods = C

Input tax credit attributable to the remaining useful life = C multiplied by 5/60

• Tax on the transaction value (‘TAX’)

Example:

Purchase cost of Asset: Rs. 1,00,000 + GST@18% (18,000) = Rs. 1,18,000, ITC availed = Rs.18,000

Asset used for 4 Yrs and 7 Months, so balance life = 5 months

So ITC of balance useful life = 18,000 x 5/60 = Rs. 1,500 (AMOUNT)

Lets Assume actual consideration is Rs. 8,000 Tax determined = 8,000 x 18% = Rs. 1,440

(TAX)

Now on comparing AMOUNT and TAX i.e. Rs. 1,500 and Rs. 1,440 AMOUNT is greater. Therefore Rs. 1,500 is payable and has to be reported in GSTR 1.

Points to Note:

• Where capital goods on which ITC has been availed, have been lost or destroyed due to any accident or are gifted to any unrelated person, the above comparison between the ITC attributable to the balance useful life and tax on the transaction value shall not have to be made as the transaction value shall be zero. In that case, only the ITC attributable to the remaining useful life shall be paid by the person.
• However, where capital goods (on which ITC availed) are gifted to a related person, for example – an employee, in order to determine the TAX, the valuation rules have to be referred in accordance with the provisions of Section 15 of the Act. The TAX, thus arrived that shall be compared with The ITC attributable to the remaining useful life of the asset (AMOUNT) and higher of TAX or AMOUNT shall be the tax liability.
• In case of capital goods such as refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, tax shall be paid on the transaction value and the method of comparing the tax with the ITC attributable to the remaining useful life of the asset shall not apply.

3.2 Where ITC has NOT been availed

If we recall the discussion at paragraph 2, transfer of capital goods on which ITC has not been availed shall be held as supply under the Act, only when consideration is involved for the transfer. Where consideration is involved, GST shall be paid on the transaction value if price is the sole consideration and the transaction is between unrelated persons. In case, where price is not the sole consideration or where the transaction is between related persons, valuation rules may be referred.

4) Margin Scheme for valuation of capital goods

Another important area for discussion is the margin scheme under the Act and its applicability in case of transfer of capital goods. The margin scheme 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. Under the margin Scheme, GST has to be paid at the applicable rate on the excess of selling price over the purchase price of the goods. Where the sale is made at a loss, no GST shall be payable.

Vide Notification 8/2018- Central Tax (Rate) dated 25 January 2018, the margin scheme was made applicable to all taxpayers on the sale of motor vehicle held as capital asset. In this regard, GST has to be paid on the excess of selling price over the written down value as per the Income Tax Act, 1961, where depreciation has been claimed by the taxpayer. Where no depreciation has been claimed, GST shall be paid on the difference in the selling price and the purchase price.

It is pertinent to note that the margin scheme is applicable for a dealer other than a person dealing in second hand goods, only in the case of motor vehicles, that too only if input tax credit has not been claimed. With respect to all other capital assets, the discussion in the above paragraphs 1 to 3 shall apply.

(The author is a practicing Chartered Accountant based in Delhi and can be reached at [email protected] or 9811933762)

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. The author does not accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied without express written permission of the author.