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Life of Capital asset 5% Per Quarter or 60 Months - Analysis of Rule 40(2) & Rule 44(6) of CGST Rule 2017

CA Arun Chhajer 
on 01 August 2020

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This is case of sale of capital goods on which ITC has been claimed earlier, So Sec 18(6) will be applied.

Sec 18(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”"

In CGST Rules, there are two provisions which refer to the above-mentioned Section 18(6) and prescribes the method for calculating the input tax credit for the said purpose. i.e. Rule 40(2) & Rule 44(6)

Life of Capital asset 5  Per Quarter or 60 Months - Analysis of Rule 40(2) and Rule 44(6) of CGST Rule 2017

As per Rule 40(2) - The amount of credit in the case of supply of capital goods or plant and machinery, for the purposes of sub-section (6) of section 18, shall be calculated by reducing the input tax on the said goods at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods

As per Rule 44(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

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 furnished in FORM GSTR-1.

Rule 44 (1) (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”

Now the issue is which rule to be followed for the purpose of Sec 18(6) as the amount of ITC under both method is different.

Let's check the calculation for more clarity

Example - Rama Krishna Pvt Ltd engaged in manufacturing of helmets. It sold a machine for Rs. 13,50,000/- (inclusive of GST @5% i.e. 67,500) on 4th May 2020. This machinery was purchased on 5th July 2018 for Rs. 26,25,000 (inclusive of GST @5% i.e. 1,25,000). Calculate the amount of tax payable on sales value as per the provisions of GST Act.

Solution -

Sl. No.

Particulars

As per Rule 40(2)

As per Rule 44(6)

1

Sale value of Machinery

Rs 13,50,000.00

Rs 13,50,000.00

2

GST on sale value @5%

Rs 67,500.00

Rs 67,500.00

3

ITC on Purchase

Rs 1,25,000.00

Rs 1,25,000.00

4

Date of Sale

4th May 2020

4th May 2020

5

Date of Purchase

5th July 2018

5th July 2018

6

Time for which Machinery had been used by Rama Krishna Pvt. Ltd.

1 Year 10 Months 29 days i.e. 8 Quarters. So ITC claimed shall be reduced by 5% each qtr. i.e.5*8 = 40%

1 Year 10 Months 29 days i.e. 23 months. So remaining useful life of the asset is total life 60months reduced by 23 months is equal to 37 months

7

Tax calculation

1,25,000 - (1,25000 - 40%) = 75,000

1,25,000*37/60 = 77,083

8

Amount payable

(highest of 2 & 7)

Rs 75,000.00

Rs 77,083.00

 

From the above calculation it is clear that amount of tax is different under both provisions. If we check Sec 18(6) carefully it saying to "reduced by such percentage points” hence Rule 40(2) seems more appropriate here, but as far the revenue is concerned department will always be in favour of Rule 44(6).

Again this is a matter where clarification by CBIC is required. As in view of taxpayer rule 40(2) is more beneficial whereas tax department will always try to apply Rule 44(6).

Conclusion: In view of above discussion it is advisable to adopt rule 44(6) here to avoid litigation with department.

Note: Above questioner is only for education purpose and not to be considered as any opinion of Author.

 

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