Sale of Capital Goods Under GST: There has always been uncertainty regarding the taxability of capital goods sales. This article attempts to address some of the questions around this problem. Capital goods are frequently sold across company lines in a variety of situations, such as when they are out-of-date, outmoded, or have reduced production capability. In certain cases, capital goods are bought both before and after the GST. ITC may be used on the same day or not. Capital goods or fixed assets are occasionally disposed of as a result of theft, fire, or other natural disasters. Concerns have also been raised about what would happen to the sale of used goods, which are separated into motor vehicles and other vehicles.
(1) GST’s applicability to capital goods sales made under the previous indirect tax system
Entry-4(a) of Schedule II of the CGST Act states, “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.”
This provision does not distinguish the capital goods purchased in the pre-GST era or post-GST era. Thus, the capital goods purchased in the erstwhile regime will also be taxed parallel to those purchased in the GST regime. All the above provisions discussed in this article will apply to both goods purchased in the pre and post-GST era.
(2) Capital goods sold that were purchased during the GST era
As previously mentioned, the sale of capital goods is subject to the same taxes as purchases made before and following the GST era. This article goes into further information about the taxability of selling capital items that were bought before and after the GST era.
(3) Sale of capital goods for consideration when ITC is availed:
Activities included in Schedule I are deemed supply even if they are performed carelessly. The permanent transfer or sale of business assets when an input tax credit has been applied to those assets shall be regarded as a supply, whether made with or without compensation, according to Entry 1 of Schedule I.
Therefore, whether or not there is consideration involved, a transfer of capital goods on which ITC has been used will be regarded as a supply.
GST amount payable shall be higher than the following amount:
| ? | Tax on transaction value determined under Section 15 or May be called Tax | |
| ? | Tax on transaction value determined under Section 15, or May be called Tax |
The amount shall be determined separately for input tax credit of central tax, state tax, Union territory, and integrated tax.
However, in cases where transaction value cannot be determined as per Section 15, valuation rules shall be applied.
Provision to Rule 44(6): Provided that where the amount so determined is more than the tax determined on the transaction value of the capital goods, the amount determined shall form part of the output tax liability, and the same shall be declared in FORM GSTR-1.
Since the amount determined is higher than the tax determined, as per proviso to Rule 44(6), the amount of 9900/- will be payable as GST and has to be reported in GSTR-1.
In case, in the above example, the tax would have been greater than the amount determined, then actual consideration will be taxable value, and the same will be reported in GSTR-1.
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(4) Sale of capital goods without consideration when ITC is availed:
As discussed above, Entry 1 of Schedule I states, “Permanent transfer or disposal of business assets where input tax credit has been availed on such assets shall be considered a supply, whether made with or without consideration.
Hence, the sale of capital goods without consideration when ITC is availed will be treated as supply under Section 7 of the CGST Act 2017.
Cases such as unintentional transfer of capital goods due to goods lost in the fire, obsolescence, gifts made, etc. will also be covered under this situation when capital goods are transferred without consideration, but ITC was availed.
(5) Sale of capital goods for consideration when ITC is not availed.
If the definition of capital goods and Entry 1 of Schedule I are read together, it seems that GST has to be paid only when ITC has been availed.
Capital goods are defined as those whose worth is capitalized in books of accounts and for which an ITC claim has been made. According to Schedule I, even if it is done without thought, the permanent disposal of business assets on which ITC is received is regarded as a supply. A straightforward interpretation of these clauses shows that for the transfer of business assets to be considered a supply, the ITC must be used.
In such a case, we should look into Section 7(1)(a) of the CGST Act, Scope of Supply, which states that “supply” includes all forms of supply of goods or services or both made or agreed to be made for consideration by a person in the course or furtherance of business. This means when goods (which include capital goods) are transferred for consideration of whether ITC is availed or not, such transfer is considered a supply.
From this discussion, it is evident that if a capital good is supplied for consideration, then GST has to be paid even though ITC has not been availed of it, but such capital goods are used for business purposes.
(6) Sale of capital goods without consideration when ITC is not availed.
In case capital goods are supplied without consideration and ITC is not availed: This situation covers cases when goods are lost, damaged, obsolete, etc. Such cases are neither covered in Section 7(1) nor in Schedule I; such transactions will not be considered as supplies, and hence no GST is payable.
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