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The definition of “capital goods” under Section 2 (19) of 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 the significant role in calculating and claiming the taxes under the ambit of Goods and Services Tax (GST).

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 on 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 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 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 framed under GST Act makes it 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’, that 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 of the loss or damage occurs through theft, fire, accident and 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, mentioned 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 CGST Act, dies, moulds and jigs, refractory bricks, fixtures and jigs to be treated as scrap, the registered person under GST Act may pay taxes on 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 the pro-rata basis, taking the useful life as five years.

1. Meaning of the term 'capital goods' In order to analyze various transactions relating to 'capital goods' it’s important to first understand the meaning of the term 'capital goods'. The term is defined in sub-clause 19 of Sec 2 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as CGST Act) as below- 19) 'capital goods' means 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; The above definition highlights for the following important aspects- a. 'Goods' only: Firstly, only 'goods' can be classified as capital goods. In other words, in no case can an 'input service' be classified as capital goods even if it satisfies the rest of the conditions. b. Capitalisation: Secondly the value of those goods must be capitalized in the books of account. c. Business Use: Finally, the goods must be used or intended to be used in the course or furtherance of business. Note: Although the terms 'fixed assets' and 'capital goods' are many a times used interchangeably in the ordinary course, it is important to understand that 'capital goods' is only a subset of fixed asset, i.e. all capital goods would qualify as fixed assets but all fixed assets may not qualify as capital goods. For example 'works contract' which may be capitalized as leasehold improvement in the books of accounts, would not qualify as capital goods though it is a fixed asset.

2. Inward supply of 'capital goods' Inward supply is directly related to Input tax credits and accordingly in this section of the write up we shall discuss about the eligibility of input tax credit on inward supply of capital goods. The taxpayer under GST is allowed to take credit of input tax charged on any supply to him of goods or services or both subject to various condition as provided in the law. The law does not make any distinction between manners of claiming input tax credit on account of inputs or capital goods, as credit in both categories is available as soon as the conditions specified in Sec 16(2) are satisfied. Although in most situations the input tax credit relating to capital goods is allowed in full, under certain circumstances either the credit is not available at all or a proportion of credit has to be reversed in a specific manner and within a specified period. Some of those situations are listed here under-

3. Specified capital goods on which input tax credit is blocked u/s 17(5) Section 17(5) prohibits input tax credit on certain goods and services and some of the entries therein have a bearing on capital goods, those entries are- i) motor vehicles and other conveyances [17(5)(a)] ii) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business [17(5)(d)] iii) goods or services or both used for personal consumption. [17(5)(g)] iv) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples [17(5)(h)] In other words if a capital good is in the nature of motor vehicle or is used for construction of an immovable property or for personal consumption or it is lost, stolen, destroyed, written off or disposed of by way of gift or free sample then the credit of the same would not be allowed.

4. Use of capital goods exclusively for exempt supplies In case where a capital good is used exclusively for exempt supplies then input tax credit of the same is not available in terms of Sec 17 of the CGST Act read with Rule 43 of the CGST Rules. 3. Use of capital goods for both taxable and exempt supplies In cases where a capital good is used for both 'taxable and exempt supplies' or for both 'business and non-business purposes' then the credit would be allowed in proportion as provided in Sec 17(1) and Sec 17(2) read with Rule 43 of the CGST Rules.

5. Outward supply of 'capital goods' It is the most important issue amongst all the issues discussed in this article. This issue is broadly divided in two parts: When the supply of capital goods is made to related party; and When the supply of capital goods is made to unrelated party. A Supply Of Capital Goods When Supplier And Recipient Are Not Related In an ordinary business transaction under GST the tax is payable at the transaction value if the conditions as provided in Sec 15 are satisfied, which are that ‘price is the sole consideration’ and ‘supplier and the recipient of the supply are not related’. The same also applies for supply of capital goods but Sec 18(6) has provided that in case the taxpayer is supplying a capital good on which input tax credit has been taken then the amount payable on the supply would not be dependent merely on the 'transaction value' but would also depend upon the 'input tax credit attributable to remaining useful life'. The concept of input tax credit attributable to the unexpired useful life and the provision of Sec 18(6) are as follows - Sec 18 Availability of credit in certain circumstances (6) 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.

6.RULE 44. Manner of reversal of credit under special circumstances (6) The amount of input tax credit for the purposes of sub-section (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 central tax, State tax, Union territory tax and integrated tax. (1) The amount of input 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 sub-section (4) of section 18 or sub-section (5) of section 29, be determined in the following manner, namely,- (a) for inputs held in stock and inputs contained in semi-finished and finished goods held in stock(b) for capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on pro-rata basis, taking the useful life as five years.

ITC Rules in Respect of Capital Goods for Purchasing under GST with Example
Below are some of the circumstances for determination of Input Tax Credit (ITC) regarding Capital Goods and reversal if any while purchasing:-

Input Tax Credit will not be provided in 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) Amount of input tax determined in 1 and 2 should be furnished in GSTR- 2 Form and the only point2 will be credited to electronic credit ledger.
d) Where Capital Goods is either used for exempting and taxable or for personal use/non- business will be calculated in the following way:-
I. Such amount shall be credited to Electronic Credit Ledger
II. 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 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 purpose & Effecting exempt supplies
Later to be used commonly for Business a non-business purpose & 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

 

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