After the implementation of GST, it was significant to the under various provisions regarding the ITC availability in the matter of the sale and purchase of capital goods under the GST regime. Here we have taken into consideration various provisions mentioned in the CGST and IGST rulebook of GST and sections mentioned thereafter.
ITC Rules on Sale of Capital Goods under GST with Example
The definition of “capital goods” under Section 2 (19) of the CGST Act means goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business. Input Tax Credit (ITC) plays a significant role in calculating and claiming the taxes under the ambit of Goods and Services Tax (GST).
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Questions Regarding the Availability of ITC on ‘Sale of Capital Goods’ such as:-
- Is that GST will be charged on the Sale of Capital Goods purchased before the implementation of GST?
- What is the procedure for the Sale of Capital Goods bought post-GST implementation?
- Is that any obligation on the sale of Capital Assets is not applicable?
- How to handle with loss/ damage of assets in the case when ITC is not applied?
- What is the procedure under GST on the sale/ disposal of capital goods when Input Tax Credit (ITC) is applied?
GST Provisions on Sale of Capital Goods
In this whole article, we will discuss the provisions regarding the sale/transfer/ disposal of capital goods to address the issues of people. Here we will cover the relevant provisions that are to be discussed, the topics are given below:-
‘Schedule II’ of CGST Act Para 4 (a), Activities to be considered a supply of Goods or Supply of Services
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 the above compliances, it is necessary to satisfy 3 conditions below:-
- Any of the goods forming part of the business assets; or
- transferred or disposed of so as no longer to form part of business assets; or
- by or under the directions of the person carrying on the business
The manner the provision is framed under the GST Act makes its applicability very broad. When all of the above conditions are fulfilled, GST will be applicable at the prescribed rate of the asset on the value mentioned under section 15 of the CGST Act.
It does not matter:-
- Whether the transaction is done with or without consideration
- Is that ITC has been provided on goods or not
- Whether the goods belong to before or after the implementation of GST
The Para regarding ‘assets of business’, may be considered either current assets or fixed assets. Therefore, particular ‘assets of business’ para, will be applied to both either ‘capital goods’ or other ‘goods’.
It must be noted that above we mentioned that the transfer or disposal made by or under the directions of the person carrying on the business. Any loss or damage that occurs through theft, fire, accident or natural calamity will not be considered supply and GST will not be levied on such assets.
Schedule 1 of the CGST ACT Para 1: Activities To Be Treated As Supply Even If Made Without Consideration
Under Schedule 1 of CGST Act Para 1, the activities that are to be considered as supply even if made without consideration are given below:-
- Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
- Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as the supply of goods or services or both. - Supply of goods—
- by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
- by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
- Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business
Section 18 of CGST Act– In case of supply of Capital Goods
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.
Under section 18 of the CGST Act, dies, moulds and jigs, refractory bricks, fixtures and jigs to be treated as scrap, the registered person under the GST Act may pay taxes on the transaction value of such goods prescribed under section 15.
Conditions and restrictions in case of supply of 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 (given in Rule 44(6) below); or
- 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
1) The amount of inputs tax credit relating to inputs held in stock, inputs contained in semi-finished and finished goods held in stock, and capital goods held in stock shall, for the purposes of subsection (4) of section 18 or sub-section (5) of section 29, be determined in the following manner, namely,-
- for inputs held in stock and inputs contained in semi-finished and finished goods held in stock, the input tax credit shall be calculated proportionately on the basis of the corresponding invoices on which credit had been availed by the registered taxable person on such inputs;
- for capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on a pro-rata basis, taking the useful life as five years.
Illustration:
- Capital goods have been in use for 4 years, 6 months and 15 days.
- The useful remaining life in months= 5 months ignoring a part of the month
- Input tax credit is taken on such capital goods= C
- Input tax credit attributable to remaining useful life= C multiplied by 5/60
2) The amount of input tax credit for the purposes of subsection (6) of section 18 relating to capital goods shall be determined in the same manner as specified in clause (b) of sub-rule (1) and the amount shall be determined separately for input tax credit of IGST and CGST.
Provision of 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 two conditions may arise that are given below:-
- The transaction with consideration: If in a case amount of ITC calculated for balance useful life as described in Rule 44 (6) of CGST Act as compared to the tax calculated on the transaction value.
- If the amount of ITC is greater (>) than tax and the registered person is to be paid that much amount and same should be treated as Output tax liability. A similar amount is to be furnished in the GSTR 1 Return Form. That means for businesses, it is necessary to prepare tax invoices and the most interesting point is that taxable value has to be reverse calculated and that value may be different from the actual consideration received.
Let us Understand with an Example
Purchasing Value of Assets is Rs 50,0000 + 18% of GST is (9000) = Total Value of Asset is Rs 59,000, ITC Taken = Rs 9,000
So ITC of balance useful life = 9000*5/60 = Rs 750 (Amount)
Let’s assume the actual consideration amount is Rs 4000. Tax calculated = 4000*18% = Rs 720 (Tax Amount)
Now comparison of the amount and Tax i.e., Rs 750 and Rs 720 respectively. The amount is higher as compared to taxes. However, the registered person under GST will have to pay Rs 750 and should be furnished in GSTR- 1 Form. Therefore, it is necessary to prepare tax invoices in this case with an invoice amounting to Rs. 4000 plus 7750 is equal to Rs 4750. However, the taxable value to be furnished in the invoice, as well as the GSTR – 1 Form, will be Rs. 4167.
When ITC Will Not be Available on Capital Goods are Given Below
However such cases we have already covered above in the schedule II Para 4 (a). Here again, two similar situations arise are as follows:-
1) Transaction with consideration: In this circumstance, GST will be payable according to the applicable rate and it is necessary to prepare tax invoices and should be reported in GSTR 1
Form.
2) Transaction without consideration:- Here again aforementioned scenario arises:- If the case supply of goods is unintentional including lost, stolen, destroyed, written off or disposed of and so on. It will not be considered the supply of goods and no GST will be levied in such cases.
If in case the transaction is intentional such as gifts, that circumstance creates the problem. Para 4(a) of the CGST Act formulates specific provisions to be treated as supply without consideration and here to be paid taxes. For calculating taxes, the value of supply will be determined according to valuation rules.
Read Also: List of Goods and Services Not Eligible for Input Tax Credit
ITC Rules in Respect of Capital Goods for Purchasing under GST with Example
Below are some of the circumstances for the determination of Input Tax Credit (ITC) regarding Capital Goods and reversal if any while purchasing:-
Input Tax Credit will not be provided under the following conditions:
- a) Capital Goods used specifically for non-business purposes or personal use
- b) Capital Goods used specifically for exempting supplies
Input Tax Credit will be provided in totality where Capital Goods have been used for effecting taxable supplies and business activity without any restrictions
- c) The amount of input tax determined in 1 and 2 should be furnished in the GSTR- 2 Form and only point 2 will be credited to the electronic credit ledger.
- d) Where Capital Goods are either used for exempting and taxable or for personal use/nonbusiness will be calculated in the following way:-
- I. Such amount shall be credited to the Electronic Credit Ledger
- II. The useful life of such capital goods shall be taken to be 5 years from the date of purchase
- III. Now the total amount of input tax credited to Electronic Credit Ledger w.r.t. whole useful life such common capital good shall be distributed over the useful life. Credit for a tax period = input tax credited to Electronic Credit Ledger/60 (5years * 12 months)
- IV. The above amount shall be calculated for all such common capital goods for every tax period namely a month
- V. The amount of credit to be added to output tax liability attributable to exempt supplies out of input tax for the common use of capital goods shall be: Credit attributable to exempt supplies = Value of exempt supplies/Total Turnover * Credit for a tax period
- VI. Remaining amount after deducting credit attributable towards exempt supplies will be allowed as ITC
- VII. All of the above calculations must be done separately for Central tax, State Tax, Union Territory Tax and Integrated Tax
- E. Where a capital good which was earlier used or intended to be specially used for Non- business purposes & Effecting exempt supplies
- Later to be used commonly for Business a non-business purposes & Effecting taxable and exempt supplies
- Input tax to be credited to electronic credit ledger would be: Input Tax – 5% of Input tax for every quarter or part thereof
Let us Understand the Situation through an Example
Mr Avinash bought a Capital Good intended to be used for effecting exempt supplies only, for Rs 1,00,000/- paying Rs 18,000 as input tax on 01/04/2017 and now on 15/11/2018, he wishes to use the capital good commonly for taxable and exempt supplies.
Now the eligible common input tax credit will be calculated as follows:
= Input Tax – 5% of Input tax for every quarter or part thereof
= 18,000 – 5% of 18000 * 3 quarters
= 18,000 – 2,700
= 15,300
Now Mr Avinash will credit Rs 15,300 to the Electronic Credit ledger and follow the steps shown in point D to calculate the input tax attributable to exempt supplies out of common credit
- F. Where a capital good which was earlier used, or intended to be exclusively used for effecting taxable supplies and business purpose
- Later to be used commonly for Business and non-business purposes & Affecting taxable and exempt supplies
- Input tax to be credited to the electronic credit ledger would be:
- = Input Tax – 5% of Input tax for every quarter or part thereof
Manner of Reversal of Credit Under Certain Cases
There are certain cases regarding input tax credits that will be added to output tax liability:-
- Where a normal taxpayer opts to pay tax under the composition scheme or goods and/or services supplied by him become exempt
- In case of supply of capital goods or plant and machinery, on which input tax credit has been taken
- Every registered person whose registration is cancelled
Input tax credit involved in the remaining useful life in months shall be computed on a pro-rata basis, taking the useful life as five years.
Illustration:
- Capital goods have been in use for 4 years, 6 months and 15 days.
- The useful remaining life in months= 5 months ignoring a part of the month
- Input tax credit is taken on such capital goods= C
- Input tax credit attributable to remaining useful life = C multiplied by 5/60
- The above calculation can be calculated separately for IGST and CGST
Capital Goods Sent on Job Work
- Where capital goods including plant & machinery have been sent to a job worker for job work, the credit of input tax shall be allowed to the principal manufacturer.
- Such goods must be received back within a period of 3 years of sending out or else it shall be treated as supply on the date on which goods were earlier sent and tax would be payable along with interest for late payment of taxes
- Where capital goods have been sent directly to the job worker after the purchase of such capital goods, the period of three years would be calculated from the date of receipt of such goods by the job worker.
