The Goods and Services Tax (GST) regime allows businesses to claim Input Tax Credit (ITC) on purchases used for taxable supplies. However, there are situations where previously claimed ITC needs to be reversed. One such scenario arises when a business sells capital goods (machinery, equipment etc.) on which they availed ITC earlier.
This article explores Section 18(6) of the Central Goods and Services Tax (CGST) Act, 2017, which governs the reversal of ITC on the sale of capital goods. We will also analyse the discrepancy between Rule 40(2) and Rule 44(6) of the CGST Rules, 2017, which prescribe different methods for calculating the reversal amount, and illustrate these methods with examples. Finally, we will discuss how to reflect these reversals in GSTR-1 and GSTR-3B forms.
Section 18(6) of the CGST Act w.r.t Rule 40(2) of CGST Rules
Section 18 (6) reads as follows:
"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:
Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15."
Rule 40 (2) of the CGST Rules, 2017 reads as follows:
"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."
Let's Analyse the Section
A. Section specifically states that Registered Person needs to pay GST and need not reverse any ITC as per Section 18 (6) read with Rule 40 (2).
B. Section specifies quantum of GST payable i.e.
- "the input tax credit taken on the said capital goods or plant and machinery reduced 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" OR
- "The tax on the transaction value of such capital goods or plant and machinery determined under section 15", whichever is higher
C. Calculation of GST payable - as mentioned in Para B - does not apply when 'refractory bricks, moulds and dies, jigs and fixtures' are supplied as 'scrap'.
Let's Summarise
Section 18(6) mandates that a registered person selling capital goods on which ITC was availed must PAY an amount equal to:
- The reduced ITC on the capital goods, OR
- The tax payable on the transaction value of the capital goods (determined under Section 15),whichever is higher.
- Now, let's read Rule 44 (6) which is as follows:
"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."
Let's Try to Understand of said Rule 44 (6)
I. Even though heading of Rule 44 is 'Manner of reversal of credit under special circumstances', sub-rule (2) talks about determination of ITC for the purpose of sub-section (6) of section 18 and as , Section 18 (6) does not talk about 'ITC reversal' but talks about liability to pay GST at the time of supply of capital goods.
II. Proviso in sub-rule (6) of Rule 44 makes it more clear that it is deals with the Quantum of GST payable at the time of supply of capital goods.
Even though heading of Rule 44 is 'Manner of reversal of credit under special circumstances', sub-rule (2) talks about determination of ITC for the purposes of sub-section (6) of section 18 and as said before, Section 18 (6) does not talk about 'ITC reversal' but talks about liability to pay GST at the time of supply of capital goods.
II. Proviso in sub-rule (6) of Rule 44 makes it more clear that it is dealing with the quantum of GST payable at the time of supply of capital goods and NOT talking about ITC to be reversed
Rule 40(2) vs. Rule 44(6): Two Methods for ITC Reversal
- Rule 40(2): This rule prescribes a fixed reduction of 5% on the ITC for every quarter or part thereof, from the date of invoice issuance for the capital goods.
- Rule 44(6): This rule mandates calculating the ITC reversal based on the remaining useful life of the capital goods, considering a notional life of 5 years. The ITC reversal is proportional to the remaining useful life expressed in months.
Impact of the Discrepancy
These two rules can result in different reversal amounts. Rule 40(2) offers a simpler calculation but may not accurately reflect the actual value remaining in the capital good. Rule 44(6) provides a more nuanced approach but requires estimating the remaining useful life, which can be subjective.
Examples
Scenario: A business purchased a machine for Rs 100,000 (inclusive of GST) in July 2023 and claimed full ITC of Rs 18,000. They sell the machine in May 2024 for Rs 70,000.
Calculation under Rule 40(2): (Number of Quarters * 5%) * ITC = (4 quarters * 5%) * Rs 18,000 = Rs 3,600
Reduced ITC = Rs 18,000 - Rs 3,600 = Rs 14,400
Tax on Transaction Value (assuming 18% GST) = Rs 70,000 * 18/100 = Rs 12,600
Higher Amount: Rs 14,400 (Reduced ITC)
Calculation under Rule 44(6): (Remaining Useful Life in Months / Notional Life (60 months)) * ITC = ((12 months - estimated remaining life) / 60 months) * Rs 18,000
Note: Estimating remaining useful life is crucial here. Suppose the estimated remaining life is 24 months.
Reduced ITC = ((12 months - 24 months) / 60 months) * Rs 18,000 = Rs 7,200
Higher Amount: Depends on the estimated remaining life. If the estimated remaining life is less than 30 months, Rule 40(2) will result in a higher reversal amount.
Reflecting Reversals in GSTR Forms
- GSTR-1: The amount determined under Sec 18(6) is to be reflected in GSTR 1
- GSTR-3B:The amount determined under Sec 18(6) is to be paid by showing as Output Tax and not as Reversal of ITC as Section 18(6) specifically stated Tax Payable.
Conclusion
So when we try to summarise or brief the Section 18(6) read with Rule 40(2) & Rule 44 (6) we can conclude that it deals with Tax Payable on supply of Capital Goods and to determine the quantum of GST Payable we have to refer Rule 40(2) & 44(6). Understanding the interplay between Section 18(6) and Rules 40(2) and 44(6) is crucial for businesses dealing with capital goods. While both methods are valid. The department will always approach a Method that benefits the Revenue so kindly choose the method carefully.
Disclaimer: We request readers to seek professional advice before arriving at any decision/conclusion after reading. We are not responsible for any loss arising to anyone after referring and relying on this article. Above views are based on our understanding of the provisions.
The author can be reached at office.bhavikco@gmail.com
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