One of the critical aspects of the Goods and Services Tax, or GST, is the taxability of “Sale of Capital Goods”. Many questions are posed regarding the taxability of Capital Goods such as:
- Whether GST is levied on Sale of Capital Goods purchased in Pre GST era?
- What will be the treatment on Sale of Capital Goods purchased after implementation of GST?
- Is there any liability on sale of Capital Assets on which Input Tax Credit (ITC) is not allowed?
- How to deal with loss/damage of asset where no consideration is received?
- Tax treatment on sale/disposal of capital goods in case when ITC is availed
In this article we will analyse the relevant provisions dealing with sale/transfer/disposal of capital goods so as to resolve the queries relevant to this issue. The relevant provisions which are to be analysed for the topic are:
- “Schedule II” CGST Act, Para 4 (a)
- “Schedule I” CGST Act, Para 1
- “Section 18 (6)” of CGST Act
- “Rule 44” CGST Rules
As in GST the taxable event is supply, so for anything liable to GST must qualify as “Supply” first. Let’s discuss the legal provisions one by one:
Schedule II CGST Act, Para 4(a):
Transfer of business assets will 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;
For invocation of above provision three conditions to be satisfied:
⇒ Any goods forming part of business assets
⇒ transferred or disposed of so as no longer to form part of business assets
⇒ by or under the directions of the person carrying on the business
The way this provision is drafted in the act makes its applicability very wide. When above conditions are satisfied GST is payable at the applicable rate for that asset on the value determined under section 15 of CGST Act. It does not matter whether:
- Transaction is done for consideration or without consideration
- ITC has been availed on those goods or not
- Goods belong to Pre GST era or Post GST era
The Para refers to “assets of a business”, which may be current assets or fixed assets. Therefore this Para applies to both whether “capital goods” or other “goods”. However since our topic is related with capital goods we will confine ourselves to that only.
One point is to be noted in above Para that such transfer or disposal should be done by or under the direction of person carrying on the business. Therefore any loss or damage of such assets due to reasons such as accident, fire, natural calamity, theft etc. will not be covered and hence will not be treated as supply and should not attract GST. However there is a rider attached to this. To understand the same we shall now proceed to Schedule I Para 1 of CGST Act.
Schedule I CGST Act, Para 1:
ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION
Para 1: Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
For invocation of above provision three conditions to be satisfied:
⇒ Permanent transfer or disposal
⇒ Business assets
⇒ ITC has been availed on such assets
Here phrase by or under the direction is missing. Therefore under this provision if ITC has been availed on business assets then no matter:
- If consideration is not involved
- Transfer / Disposal is intentional or unintentional
It can be settled now that if ITC has been availed on assets then even in case of accident, fire, natural calamity, theft (unintentional cases) and gift (intentional case) etc. will be treated as supply.
After combined reading of Schedule II Para 4(a) and Schedule I Para 1, it can now be deduced that all cases of transfer or disposal or business assets will come under GST net.
Only case, which does not qualify as supply and will not attract GST liability is:
- Where ITC is not availed on assets
- Such assets are transferred or disposed of so as no longer to form part of business assets
- Without any consideration
- Without any directions of the person carrying on the business (such as accident, fire, natural calamity, theft etc)
Now after above discussion, in case of sale of capital goods, scope of supply is clear. So whatever comes within the scope of supply is taxable under GST unless otherwise specifically exempted either by charging section 9 or under any exemption notified.
Valuation and determination of Tax payable:
Moving ahead, second question arise, what is the value on which tax is to be paid. To understand this all cases can be segregated in as:
- Cases where ITC is availed on Asset
- Cases where ITC is not availed on Asset
Where ITC has been availed on Capital Goods:
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.”
So in case of Supply of Capital Goods on Which ITC has been taken below is payable:
⇒ 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 (given in Rule 44(6) below)
⇒ The tax on the transaction value of such capital goods or plant and machinery determined under section 15,
whichever is higher
Rule 44(6) CGST Rules:
It provides that the amount of input tax credit for the purposes of sub-section (6) of section 18 relating to capital goods shall be computed on pro-rata basis, taking the useful life as five years. The amount shall be determined separately for input tax credit of central tax, State tax, Union territory tax and integrated tax
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
Proviso to Rule 44(6) :
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.
Now further two situations may arise:
- Transaction involves consideration: In such cases amount of ITC calculated for balance useful life as prescribed in Rule 44(6) has to be compared with Tax determined on the transaction value.
♦ If Amount > Tax = Amount is to be paid, and same shall be treated as Output tax liability. This will have to be reported in GSTR 1. This means Tax Invoice has to be prepared and important point here is that taxable value has to be reverse calculated and that value may be different from actual consideration received e.g.
Purchase cost of Asset : Rs. 50,000 + GST@18% (9000) = Rs. 59,000, ITC Taken = Rs. 9,000
Asset used for 4 Yrs and 7 Months, so balance life = 5 months
So ITC of balance useful life = 9000 x 5/60 = Rs. 750 (Amount)
Lets Assume actual consideration is Rs. 4000, Tax determined = 4000 x 18% = Rs. 720 (Tax)
Now on comparing Amount and Tax i.e Rs. 750 and Rs. 720, Amount is greater. Therefore Rs. 750 is payable and has to be reported in GSTR 1. Therefore Tax Invoice has to be prepared in this case with Invoice Value as Rs. 4000+750 = Rs. 4,750, However taxable value to be reported in invoice and GSTR 1 will be Rs. 4167.
♦ If Tax > Amount = In such cases tax invoice has to be prepared and Actual consideration will be taxable value. Same has to be reported in GSTR 1.
- Transaction is without any consideration: Such cases will further have to be divided in two category-
♦ If transaction is intentional such as gift. Since Para 1 of schedule I creates a deeming fiction so as to treat such transaction as Supply even without consideration, therefore this is certain that tax has to be paid. Also since asset is gifted to someone, this has also resulted in a transaction for which no price consideration is there.
Now for calculation of Tax, value of supply has to be determined. Therefore we need to refer Section 15, which provides, when transaction between two unrelated parties and Price is sole consideration then transaction value will be treated as value of Supply. Since in above case these two conditions are not satisfied as no Price is there in case of gift, therefore we have to go for valuation as per valuation rules.
♦ If transaction is unintentional such as Damage/Lost Assets, Theft, etc. Since in such cases no transaction has taken place, therefore no transaction value is there so Tax cannot be determined. Therefore amount as determined as per rule 44(6) will have to be paid as output tax liability.
Some professionals are of the view that since such cases are also deemed as supply therefore in such cases also value must be determined as per section 15 CGST Act and valuation rules on which Tax must be calculated and compared with amount of ITC determined.
However in my opinion this cannot be the intention of law to tax the assessee in such cases also but whatever benefit has been given in form of ITC must be withdrawn as the asset ceases to be used for business for which benefit was given. Therefore only ITC so determined for balance useful life is to be payable under such cases of unintentional disposal of asset.
Rest of the process will be same so as to calculate the amount of ITC for balance useful life and comparing it with Tax determined as already explained above. Here in both cases whether intentional or unintentional tax invoice has to be prepared and reported in GSTR 1.
Some Important Points to take note:
Here this has to be understood that as per Rule 44(6) amount has to be calculated separately for input tax credit of central tax, State tax, Union territory tax and integrated tax.
Therefore one question arises:
If Mr. A Purchased a Capital Asset from local dealer, he will get the Tax invoice with CGST and SGST Charged on it. Now let’s assume he sells this asset after 4 yrs 7 months. Now as per Rule 44(6) he has to calculate ITC for remaining useful life of 5 months, that too separately for CGST and SGST. Whatever amount comes if that becomes higher than Tax on transaction value than same will be payable as output liability. That means output liability will also be in CGST and SGST.
Now problem comes when Mr. A wants to sell this asset to Mr. B who is in another state. As per current provisions of law, in our opinion there is no option to bill Mr. B on IGST. In this case how billing is to be done?
Another important question:
What will happen in case such capital asset was purchased by Mr. A in pre GST Era and taken VAT credit only (assuming Mr. A is trader). Such VAT credit is converted in SGST credit as per Transition rules. Now only SGST is taken on such capital asset. In such cases also how billing is to be done, as while calculating amount of ITC for balance life only SGST credit will come as CGST credit has not been taken.
In my opinion more clarity is needed on the issue. Therefore till the time, we must follow the basic invoice rules and place of supply concept laid down by IGST Act to prepare invoice.
Where ITC has not been availed on Capital Goods:
Since ITC has not been availed on capital goods therefore Schedule I Para 1, Section 18(6) and Rule 44(6) not applicable. Since all these provisions deals with cases where ITC has been taken.
However such cases will be covered by Schedule II Para 4(a) which is already explained above. Now here also two situations will arise:
- Transaction involves consideration: In this case GST is payable as per applicable rate and Tax invoice has to be prepared. Reporting will done in GSTR 1.
- Transaction is without consideration: Here again as already explained above two scenarios emerge:
- If transaction is unintentional such as Damage/Lost Assets, Theft, etc. This case is already explained above that it will not be treated as supply and therefore no GST liability.
- If transaction is intentional such as gift, that situation creates some problem. Since Para 4(a) of schedule II creates a deeming fiction so as to treat such transaction as Supply even without consideration, therefore here also tax has to be paid. Now for calculation of Tax, value of supply will be determined as per valuation
The entire discussion above can be summarised in below chart:
|Sale of Capital Goods In GST Era|
|ITC Availed||No ITC Availed|
|Consideration on Disposal||No Consideration||Consideration on Disposal||No Consideration|
|Calculate Amount of ITC for Balance Useful Life as per Rule 44(6) CGST Rules||Do||Do||NA||NA||NA|
|Calculate Tax on Transaction Value as per Section 15 CGST.||Calculate Tax on Transaction Value as per Section 15 CGST Act and Rules||NA||Calculate Tax on Transaction Value as per Section 15 CGST Act.||Calculate Tax on Transaction Value as per Section 15 CGST Act and Rules||NA|
|If Amount > Tax = Pay Amount as Output Tax Liability,||Do||Pay Amount as Output Tax Liability||NA||NA||NA|
|If Tax > Amount = Pay Tax as Output Tax Liability,||Do||NA||NA||NA||NA|
|Issue Tax Invoice, Report in GSTR 1||Do||Do||Do||Do||NO GST Applicable|
(Authored by CA Praveen Gupta, Partner in GGM & Associates, Chartered Accountants)
Disclaimer: The above write up has been compiled from various provisions of GST Act and notifications/circular/order issued there under. The compilation may not be entirely correct for reader to reader due to different interpretations by different readers. The readers are advised to take into the consideration the prevailing legal position before acting on any of the comments in this write up. Readers are also requested to convey the correct position as per their interpretation of the relevant provisions of law, which shall be most welcome for correcting this write up.