💼 𝗚𝗦𝗧 𝗜𝗺𝗽𝗹𝗶𝗰𝗮𝘁𝗶𝗼𝗻𝘀 𝗼𝗻 𝗦𝗮𝗹𝗲 𝗼𝗳 𝗙𝗶𝘅𝗲𝗱 𝗔𝘀𝘀𝗲𝘁𝘀: 𝗧𝗮𝘅𝗮𝗯𝗶𝗹𝗶𝘁𝘆, 𝗜𝗧𝗖 𝗥𝗲𝘃𝗲𝗿𝘀𝗮𝗹 & 𝗖𝗼𝗺𝗽𝗹𝗶𝗮𝗻𝗰𝗲

Taxability of Sale of Capital Goods has always been a subject of confusion. Business uses many Capital goods for their operations; GST paid on the procurement of these assets can be availed as Input Tax Credit (ITC). Under GST, the treatment of capital goods at the time of their sale or disposal is governed by specific provisions. These provisions ensure that any ITC availed on such goods is properly accounted for when the Capital goods are sold or disposed. This article explains all about the ITC rules for capital goods.

❓ 𝗪𝗵𝗮𝘁 𝗮𝗿𝗲 𝗰𝗮𝗽𝗶𝘁𝗮𝗹 𝗴𝗼𝗼𝗱𝘀?

Capital goods are defined u/s 2(19) of the CGST Act, 2017 as “Goods, the value of which is capitalised 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.”

When a business purchases capital goods, it has two options regarding the treatment of GST:

1. Capitalise the GST component: The business may choose not to claim Input Tax Credit (ITC) on the GST paid. In this case, the entire cost of the capital goods, including GST, is capitalised, and depreciation can be claimed on the gross value under the Income Tax Act, 1961.

2. Claim Input Tax Credit (ITC): Alternatively, the business may opt to avail the ITC on the GST paid. In this scenario, only the net cost (excluding GST) is capitalised for depreciation purposes, and depreciation is claimed on this reduced value.

 As per the above definition, only those goods qualify as capital goods under GST that are accounted in the books of accounts and are to be used for business purposes, which means goods that are used for personal purposes do not qualify as capital goods.

🏷️ 𝗦𝗮𝗹𝗲 𝗢𝗿 𝗗𝗶𝘀𝗽𝗼𝘀𝗮𝗹 𝗼𝗳 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗚𝗼𝗼𝗱𝘀 

Businesses often sell or dispose of old laptops, machinery, or other capital assets. But how does GST treat such transactions?

Let’s break this down based on 𝘄𝗵𝗲𝘁𝗵𝗲𝗿 𝗜𝗧𝗖 𝗵𝗮𝘀 𝗯𝗲𝗲𝗻 𝗮𝘃𝗮𝗶𝗹𝗲𝗱 𝗼𝗿 𝗻𝗼𝘁.

📌 𝗜𝗳 𝗜𝗧𝗖 𝗵𝗮𝘀 𝗯𝗲𝗲𝗻 𝗮𝘃𝗮𝗶𝗹𝗲𝗱

• When capital goods on which ITC has been availed are sold, it shall be treated as a supply and GST shall be paid, the immediate question is how to arrive at the GST amount Payable.

In this case, the GST amount payable as per Section 18(6) read with rule 44(6) is higher of the following:

a) GST on the Transaction Value, or

b) ITC attributable to the remaining life of the asset (out of 5 years or  60 months).

• Also, if the Capital goods are disposed of or sold for NIL consideration, it is clear that as per Schedule 1 of the CGST Act, “Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.” Shall be treated as a supply even if made without consideration.

In such a case, the GST liability shall be the ITC attributable to the remaining life of the asset.

📌 𝗜𝗳 𝗜𝗧𝗖 𝗵𝗮𝘀 𝗻𝗼𝘁 𝗯𝗲𝗲𝗻 𝗮𝘃𝗮𝗶𝗹𝗲𝗱

• In cases where Capital goods are sold for a consideration on which ITC has not been availed, now this becomes a challenging situation for many of us, we’ll make it clear. On just interpreting the definition of Capital Goods as mentioned above, we can conclude that GST is payable only on the supply of Capital Goods on which ITC has been availed and may consider it as there is no liability to pay GST.

But let us also consider Section 7 of CGST Act, where the it defines the scope of supply which includes “All forms of supply of goods or services or both such as sale, transfer, exchange…” and Para 4 (a), Schedule II of CGST Act, it is evident that sale of Capital goods for a consideration shall be treated as supply of goods even when ITC has been not availed on such goods and GST liability shall be on transaction value.

Despite the clarity of these legal provisions, it has been observed that this specific scenario is frequently overlooked during audit procedures. Many businesses mistakenly assume that GST is not applicable to the sale of capital goods where ITC was never claimed. This leads to non-compliance, resulting in potential tax exposure, interest, and penalties.

• Where the Capital Goods are supplied for Nil consideration and ITC has not been availed, in this situation covers cases where Capital Goods are lost, damaged by fire, disposed on account of becoming obsolete, etc.

Section 7 of the CGST Act covers all forms of supply of goods and services that are made for a consideration

Whereas Schedule I covers the transfer of business assets where input tax credit has been availed on such assets, even without consideration. Hence, in this case, GST is not liable to be paid since we have not claimed the ITC nor received any consideration.