GST on transfer of Capital Goods
What are Capital Goods?
As per section 2 (19) of the Central Goods and Services Tax (CGST) Act, 2017, capital goods means goods, the value of which is capitalized in the books of account of the person claiming the Input Tax Credit (ITC) and which are used or intended to be used in the course or furtherance of business, such as buildings, machinery, equipment, vehicles, and tools that organizations utilize in the production of goods or services.
Input Tax Credit - ITC on Capital Goods
When we purchase any capital good (say, machinery for a factory), we pay goods and service tax (GST) on it. Such GST paid can be claimed as credit at the time of the original purchase.
Note: as per provisions of CGST Act,2017 input tax credit(ITC) can be claimed on satisfaction of the following conditions: (annexure 1)
Capital goods that are used for business purposes.
Capital goods that are not exclusively used for effecting exempt supply.
ITC is claimed within prescribed time.
For capital goods used for both taxable and exempt supplies, ITC is available as per rule 43 of the CGST rules, 2017.
Requirements of section 16 of CGST Act,2017 are fulfilled.
GST Rate
The GST rate for the sale of used capital goods shall be the GST rate based on the HSN code of the capital good being sold.
Applicability Of GST On Sale Of Capital Goods
To explain the applicability of GST on the sale of Capital Goods, let's understand the following scenario:
Capital Goods supplied for consideration on which ITC has been availed.
Capital Goods supplied for consideration on which ITC has not been availed.
Capital Goods supplied for NIL consideration on which ITC has been availed.
Capital Goods supplied for NIL consideration on which ITC has not been availed.
Capital Goods Supplied for Consideration On Which ITC Has Been Availed
GST shall be paid when a fixed asset is supplied on which ITC has been availed.(annexure 3)
How much GST is to be paid?
The GST payable will be higher of the following:
GST on transaction value (Sale consideration), or,
ITC attributable to the remaining life of the good. (based on 5 years or 60 months)
For example:
GST on transaction value: 5,00,000*18% = ₹ 90,000
Calculation for ITC attributable to the remaining life of the good =
{ITC availed on the Capital Good/(5 years or 60 months)* Remaining Life of capital Good}
= ₹2,00,000/60* 32 = ₹96,000
GST Burden
The supplier is liable for payment of the tax.
A supplier can use the following two methods for invoicing:
To collect GST on transaction value from the buyer ( as per example ₹ 90,000). GST amount exceeding the GST on transaction value (Above ₹ 90,000; i.e. ₹ 6,000 according to example), shall be paid by the supplier.
To gross up the consideration, it means to treat the agreed sale price (the fixed amount agreed between the buyer and supplier) as including GST. The GST is then paid out of the sales consideration received by the supplier.
Conclusion: In this scenario, it is evident that we have to pay an amount of ₹ 96,000 for the supply of the asset since it is higher of the two values.
Capital Goods Supplied for Consideration On which ITC Not Availed
If a capital good is transferred/disposed of for consideration, then such transfer/disposal shall be treated as supply of goods. (Annexure 2)
Thus GST is to be paid on the supply of capital goods.
But how much GST is to be paid ?
Only the transaction value will be taken into account while computing GST.
Since no ITC is availed at the time of purchase of the capital good, the 5-years or 60-months criteria will not be considered.
For example:
GST on transaction value = ₹ 5,00,000*18%= ₹ 90,000
The ITC pertaining to the remaining good’s life = N.A. (not applicable)
GST Burden
The supplier is liable for payment of the tax. a supplier can use the following method for invoicing:
To collect GST on transaction value from the buyer ( as per example ₹ 90,000).
To gross up the consideration, it means to treat the agreed sale price (the fixed amount agreed between the buyer and supplier) as including GST. The GST is then paid out of the sales consideration received by the supplier.
Conclusion: If a capital good is supplied for consideration then GST has to be paid even though ITC has not been availed. Thus, the amount of GST payable will be ₹ 96,000.
Capital Goods Supplied for Nil Consideration and ITC Availed
Capital goods permanently transferred or disposed of for NIL consideration fall under the scope of supply of goods. (Annexure 3)
Thus, GST is applicable in this scenario.
GST is to be Paid?
GST amount payable will be higher of the following:
GST on transaction value, or,
ITC attributable to the remaining life of the good.(out of 5 years or 60 months).
For example:
GST on transaction value = N.A. (not applicable)
The ITC pertaining to the remaining asset life = (1,80,000/60) *32 = ₹ 96,000
Thus, the amount of GST payable will be ₹ 96,000.
GST Burden
The supplier is liable for payment of the tax. a supplier can use the following method for invoicing:
In the absence of GST on transaction value the GST amount ( ₹ 96,000 according to the example), shall be paid by the supplier.
Conclusion: In this scenario, it is evident that we have to pay an amount of ₹ 96,000 for the supply of the good since GST on transaction value is not applicable.
Capital Goods Supplied For Nil Consideration And No ITC Availed
As per schedule I of the CGST Act,2017, (Annexure 4)
Transfer or disposal of capital goods under this scenario will not be considered as supply.
And thus, no GST is to be paid in this scenario.
Conclusion: GST is not liable to be paid in this scenario.
Annexure 1
2.1Section 17(1) of the Central Goods and Services Tax (CGST) Act, 2017 states that,” Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.”
2.2 Section 17(1) of the Central Goods and Services Tax (CGST) Act, 2017 states that, “Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”
Annexure 2
3.1 Section 17(1) of the Central Goods and Services Tax (CGST) Act, 2017 states that, 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.
Annexure 3
1.1 As per schedule II of the CGST Act, Para 4(a):
Transfer of business assets will be treated as a supply of Goods:
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 consideration, such transfer or disposal is a supply of goods by the person.
Annexure 4
5.1 Schedule I of the CGST Act, among other things, considers the following activities as supplies even without consideration.
Permanent transfer or disposal of assets with availment of ITC. However, certain conditions need to be met:
In the supply, permanent transfer or disposal of assets should have been made
Availment of ITC on these assets
Transfer should be permanent.
Disclaimer: This article is based on the information available as of December 30, 2024. The content reflects the author's interpretations of provisions of the CGST Act,2017 on transfer or disposal of capital goods. While every effort has been made to ensure the accuracy of the information, the author does not guarantee its completeness or reliability. Readers are advised to consult with a professional tax advisor for specific advice tailored to their individual circumstances.