GST Impact on Sale of Capital Goods (Business Assets)

In this article, we will discuss the GST impact on Sale of Capital Goods (i.e. Business Assets).

First, we will discuss the Definition of Capital Goods.

Capital Goods

As per the Section 2(19) " 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.

For the Purpose of Qualifying the Goods as a Capital goods following conditions should be satisfied.

1) Goods should be capitalised in the Books of Accounts. (It can by anything whether Fixed Assets or Current Assets).

2) ITC Should be availed on such goods.

3) Such goods should be used for the furtherance of business.

Now we will discuss the Provision of the Supply. (As GST is applicable if only there is a supply)

1) As per the Schedule I of CGST Act 2017, Permanent transfer or disposal of business assets where input tax credit has been availed on such assets considered as a supply even if such transaction is without Consideration.

For the Purpose of above Provision three Conditions to be satisfied:-

1) Permanent transfer or disposal.
2) Business assets.
3) ITC has been availed on such assets.

2) As per the Schedule II of CGST Act 2017, 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, such transfer or disposal is a supply of goods by the person.

For the Purpose of above Provision three Conditions to be satisfied:-

1) Any goods forming part of the assets of a business.
2) Transferred or disposed of so as no longer to form part of those assets.
3) By or under the directions of the person carrying on the business.

However entry in Schedule II does not matter whether,

1) Transaction is done for Consideration or Without Consideration.
2) ITC has been availed on those goods or not.
3) Goods belongs to pre GST era or Post GST era.

A combined reading of above Provisions we can conclude that GST will be applicable on transfer of Capital Assets or Business Assets even if,

1) Such Transfer is for Consideration or Without Consideration.
2) ITC on such Goods has been availed or not.
3) Such Goods are belongs to pre GST era or Post GST era.
4) Whether such transfer is for Intentional (i.e. Sale, transfer, Gift etc.) Or Unintentional (i.e. Loss, Damage due to fire or natural calamities.)

However If Capital goods are loss or damage due to fire or natural calamities or beyond the control of human being and ITC on those goods not availed then such loss or damage does not fall within ambit of supply.

Valuations

The value should be HIGHER of,

1) Section 18(6) of CGST Act 2017, {Read with rule 44(6)}
2) Transaction value as determined under section 15 of the CGST Act 2017.

A) Section 18(6) of CGST Act 2017, {Read with rule 44(6)}

Section 18(6) of CGST Act 2017

In case of a 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 5% (Rule 44) for every quarter or part thereof from the date of the issue of the invoice for such goods (As per Rule 40)

Manner of reversal of credit under Rule 44

Capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on a pro-rata basis, taking the useful life as FIVE years.

Illustration

• Capital goods have been in use for 4 years, 6 month and 15 days.
• The useful remaining life in months= 5 months ignoring a part of the month
• Input tax credit is taken on such capital goods= C
• Input tax credit attributable to remaining useful life= C multiplied by 5/60

B) Transaction value as determined under section 15 of the CGST Act 2017

The value of a taxable supply of goods or services or both shall be the "TRANSACTION VALUE".

Transaction Value: It is a combination of three elements.

"Price actually paid or payable for the supply (+) Supplier and the recipient of the supply are not related (+) Price is the sole consideration for the supply"

Valuation in case of Transfer of Capital Goods (Business Assets) in the Following Scenario:-

A) ITC has been availed on Capital Goods

1) Transaction is for Consideration (Intentional Transfer Excluding Gift):-

i) Section 18(6) of CGST Act 2017, {Read with rule 44(6)} OR
ii) Transaction value as determined under section 15 of CGST Act 2017.

Whichever is higher

2) Transaction is without any Consideration (Including Intentional transaction (i.e. Gift) or Unintentional transactions):-

i) Section 18(6) of CGST Act 2017, {Read with rule 44(6)}

B) ITC has not been availed on Capital Goods

1) Transaction is for Consideration(Intentional Transfer Excluding Gift):

i) Transaction value as determined under section 15 of CGST Act 2017.

2) Transaction is without any Consideration (Including Intentional transaction (i.e. Gift) or Unintentional transactions):-

i) In case of Gift: Value of supply will be as per Valuation.
ii) In case of Unintentional transactions: It will not be treated as supply.