Understanding GST Implications on Sale of Capital Goods: A Comparison of Rule 40(2) and Rule 44(6)
Under the Goods and Services Tax (GST) regime in India, the sale of capital goods on which Input Tax Credit (ITC) has been claimed triggers a specific tax liability. This liability is governed primarily by two rules—Rule 40(2) and Rule 44(6) of the CGST Rules, 2017. These provisions ensure that the government recovers a portion of the ITC related to the remaining useful life of the asset, if such goods are disposed of before the end of their useful lifespan.
Tax Liability on Sale of Capital Goods
When capital goods are sold, the seller must pay GST on the higher of the following two values:
- GST on the transaction value (i.e., the actual selling price of the asset), or
- Reduced Input Tax Credit—a calculated amount representing the ITC related to the unutilized portion of the asset’s useful life.
The methodology for calculating this Reduced ITC depends on whether Rule 40(2) or Rule 44(6) is applicable.
Key Differences Between Rule 40(2) and Rule 44(6)
| Aspect | Rule 40(2) | Rule 44(6) |
| Basis of Calculation | Quarterly reduction of ITC at 5% per quarter or part thereof | Proportionate reversal based on a 60-month useful life |
| Reduction Mechanism | 5% of ITC is reduced for every quarter or part from invoice date | ITC reversed proportionally based on number of months used |
| Applicable When | Capital goods are sold after availing ITC | Capital goods are disposed during business discontinuance or change |
| Full ITC Reversal Requirement | No, unless disposed within 5 years | Yes, proportional to remaining months within 5-year window |
| After 5 Years | Only GST on transaction value is applicable | Rule does not apply beyond 60 months |
Both rules ensure ITC is proportionately adjusted if capital goods are sold before the end of their deemed useful life, which is considered to be five years (i.e., 60 months or 20 quarters). However, if the capital goods are sold after five years, then neither rule applies for ITC reversal, and GST is only charged on the sale value.
Capital Goods Lost, Stolen, or Destroyed
It’s important to note that if capital goods are lost, stolen, or destroyed, neither Rule 40(2) nor Rule 44(6) is applicable. Instead, Section 17(5) of the CGST Act mandates a complete reversal of the ITC previously claimed on such goods.
Conclusion
The sale of capital goods under GST involves specific compliance with either Rule 40(2) or Rule 44(6), depending on the nature of disposal and the duration of use. The essential goal of both rules is to ensure that the ITC is availed only for the actual period of use and any unutilized benefit is reversed appropriately. Businesses must carefully assess these provisions when disposing of capital assets to ensure accurate GST payment and compliance.
