In case of sale of capital goods under GST, the tax liability for the same has to be calculated in a special manner. The treatment of Capital goods under GST is covered under the below sections:
1. Section 18 (6) of the CGST Act
2. Schedule I of the CGST Act
3. Schedule II of the CGST Act
4. Rule 44 of the CGST Rules
Section 18(6) of the CGST act simply states that in case of sale of capital goods, any credit taken in respect of capital goods has to be reversed as calculated as per Rule 44 and added to the output tax liability for the month. The resulting amount of reversal will be the tax liability on the sale of capital goods or the tax on the transaction value of capital goods, whichever is higher.
Schedule II determines the situations where the sale of capital goods is a taxable event. According to Schedule II the following conditions should be satisfied for sale of capital goods to be a taxable event
1. The goods should form part of business assets
2. They are so transferred that they no longer form part of business.
3. They are transferred under the instructions of the person carrying on the business.
Note:- The assets should be sold by the person carrying on the business. Hence in case of calamity like fire, accident, theft there will be no liability to pay tax.
Schedule I states that permanent disposal of assets even if made without consideration has to be treated as supply where ITC has been availed on such assets. This means that even writing off of capital goods will be treated as a taxable event.
The above provisions are mentioned in the CGST act . For valuation purposes we have to look at the rules for sale of capital goods. Rule 44 contains the procedure for sale of capital goods. This is where the provision gets very complicated and requires special attention.
Rule 44 states that ITC taken on capital goods shall have to be reversed in case of sale on a pro rata basis where the useful life of any capital goods will be taken as 5 years. The rule is explained via an example below:
Suppose the ITC taken on an Asset of Rs 50000 is 50000*18% i.e Rs 9000 and actual sale value is Rs 4000. Tax paid on actual sale value = 4000*18%= Rs 720. The ITC to be reversed will be as below: