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March 20, 2021

Treatment of Input tax credit at the time of Sale of Capital goods under GST

by Mahesh Mara in GST

Treatment of Input tax credit at the time of Sale of Capital goods under GST

Capital goods are assets which are capitalised in the books of accounts which are involved in the production of goods and services for instance plant and machinery, building, equipment, Computer etc. Capital goods are not consumed when the final product is made. Therefore, they cannot be entirely deducted as business expenses in the year of their purchase. Instead, capital goods are depreciated over the course of their useful lives.

As per section 2(19) of the CGST Act, ‘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.

As per GST rules useful Life of the Capital Goods is 5 years.

Treatment of Input tax credit in case of sale of Capital goods:

As per section 18(6)In case of supply of capital goods or plant and machinery, on which input tax credit has been availed, the taxpayer shall pay an amount equal to higher of:

a. Input tax credit taken on the capital goods or plant and machinery reduced by such percentage points as may be prescribed, or;

b. The tax on the transaction value of such capital goods or plant and machinery determined under section 15.

The above provision of the CGST act covers the circumstances wherein capital goods are being sold after business use and it stipulates that in such cases amount payable by the supplier has to be either Input Tax Credit as reduced by percentage points as may be specified in rules or tax on transaction values whichever is higher.

As per Rule 40(2) of the CGST Rules it is been given that for the purpose of Section 18(6), input tax credit reversal in the case of supply of capital goods and plant and machinery shall be calculated b reducing 5% point for every quarter or part thereof from the date of issue of invoice for the capital goods.

For Instance:

Mr. D has purchased a computer on 1/11/2019 for Rs. 67,000 and paid Rs. 12030 GST on such goods. Later on 15/03/2021 Mr. D sold the Computer for Rs. 27,000.

Let us compute the amount of ITC to be reversed

Calculation of Amount to be reversed for sale of computer

Amount of reversal will be higher of a or b

 ParticularCGSTSGST
 ITC availed on Computer 6,030 6,030
Less:5% of Total ITC availed per quarter or part of the quarter 1,809 1,809
 (In our case we have use computer for 6 quarters)  
A.Amount of ITC to be reversed 4,221 4,221
B.GST on sale of Computer 2,430 2,430
 Amount of ITC to be reversed (higher of A or B) 4,221 4,221

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