SALE OF CAPITAL GOODS – GST LIABILITY

[BHAGYATEJA REDDY]

In the recent past there is a lot of confusion as to whether GST has to be paid on sale of capital goods or not. I have tried to clear the confusion by explaining the above aspect in the following scenarios.

1. Capital Goods Supplied for a consideration on which ITC has been availed.
2. Capital Goods Supplied for a consideration on which ITC has not been availed (Including assets acquired before GST Regime).
3. Capital Goods Supplied for NIL consideration on which ITC has been availed.
4. Capital Goods Supplied for NIL consideration on which ITC has not been availed (Including assets acquired before GST Regime).
5. Supply of Motor Vehicles.

Let us understand in detail about the tax implications in each scenario.

1. Capital Goods Supplied for a consideration on which ITC has been availed:- When an capital good on which ITC has been availed is supplied, GST Shall be paid. The immediate question is how to arrive at the GST amount Payable. In this the GST amount payable is higher of the following
   1. GST on the Transaction Value. or
   2. ITC attributable to the remaining life of the asset (out of 5 years or 60 months)*.

Let us take an example to understand this with GST Rate as 18%.

          Purchase Price of an Capital Good       :        10,00,000.00

          ITC availed on the Capital Good           :        1,80,000.00

          Used life of Capital Good                      :        27 Months. 

          Remaining Life of capital Good             :        33 Months (60-27).

          Transaction Value                                  :       4,00,000.00

So the GST Payable will be higher of GST on transaction value i.e., 72,000.00 (4,00,000*18%) or the ITC pertaining to remaining life of asset i.e., 99,000.00 (1,80,000*33/60).

          In this scenario it is evident that we have to pay an amount of ₹ 99,000 on supply of the asset.

          *As per the Section 18(6) read with Rule 44(6) tax has to be paid if a capital good is supplied before the expiry of 5 years i.e. 60 months.

2. Capital Goods Supplied for a consideration on which ITC has not been availed:- This is the scenario where all the confusion is cropping up. There are some views that GST has to be paid on supply of Capital Goods only when the ITC has been availed. The confusion is being created by drawing the definition of capital good in to picture. Let us understand the definition first.

Capital Good 2 (19):- “Capital Goods” means goods, the value of which is capitalized in the books of accounts of the person “claiming the input tax credit”…….

          On plain reading of the capital good definition we can conclude that GST is payable only on the supply of capital goods on which ITC was availed. But let us look into the section 7 of CGST act.

Scope of Supply (Sec.7):- The extract from the definition of scope of supply is as follows

For the purpose of this Act, the expression “Supply” Includes

1. All forms of supply of goods or services or both.

As per section 7, the GST is payable on goods which includes capital goods also. As per the supply definition the relevance of Capital Good definition is not relevant. But the definition of the capital good has to be considered in the scenario No.4.

From the above discussion it is evident that if a capital good is supplied for consideration then GST has to payable even though ITC has not been availed on it. The amount of GST payable will be based on the transaction value only and does not depend 5 years or 60 months criteria.

Let us take an example to understand this with GST Rate as 18%.

Purchase Price of an Capital Good       :         10,00,000.00

 ITC availed on the Capital Good          :           NIL

 Used life of Capital Good                     :         27 Months. 

 Remaining Life of capital Good            :         33 Months (60-27).

 Transaction Value                              :           4,00,000.00

So the GST Payable will be the GST on transaction value i.e., 72,000.00 (4,00,000*18%).

3. Capital Goods Supplied for NIL consideration on which ITC has been availed:- This is the another scenario where the confusion is there. For understanding this scenario we will again look into the section 7 of CGST act

Scope of Supply (Sec.7):- The extract from the definition of scope of supply is as follows

For the purpose of this Act, the expression “Supply” Includes

1. All forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration……
2. ………
3. The activities specified in Schedule I, made or agreed to be made without a consideration.

As per the Section 7 (a) we may think that a supply without consideration is not a supply but in the Section 7(c) it specifically includes the Schedule I where those transactions will be treated as supply even if the consideration is not there. Let us analyze the Schedule-I.

                    Entry 1 of the SCHEDULE-I of CGST Act reads as follows

          Permanent Transfer or disposal of business assets where input tax credit has been availed on such assets.

By reading the section 7(c) and the Schedule –I it is evident that GST has to be paid on supply of the capital goods for NIL consideration on which ITC has been availed. The next question is amount of GST payable,

Let us take an example to understand this with GST Rate as 18%.

          Purchase Price of an Capital Good     :         10,00,000.00

          ITC availed on the Capital Good         :         1,80,000.00

          Used life of Capital Good                    :         27 Months. 

          Remaining Life of capital Good           :         33 Months (60-27).

          Transaction Value                                :         NIL

So the GST Payable will be higher of GST on transaction value i.e., NIL or the ITC pertaining to remaining life of asset i.e., 99,000.00 (1,80,000*33/60).

          In this scenario it is evident that we have to pay an amount of ₹ 99,000 on supply of the capital good.

4. Capital Goods Supplied for NIL consideration on which ITC has not been availed:- This is relatively a  better scenario where no confusion is there. The cases when the Capital Good is lost, stolen, damaged in fire, obsolete, given as gift to non-related person, etc., all these cases will come under this scenario. Let us understand by analyzing the section.

Scope of Supply (Sec.7):- The extract from the definition of scope of supply is as follows

For the purpose of this Act, the expression “Supply” Includes

4. All forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration……
5. ………
6. The activities specified in Schedule I, made or agreed to be made without a consideration.

With the above section it is clear that GST is not liable to be paid on supply of capital goods when we have not claimed the ITC and we have not received any consideration for that supply.

5. Supply of Motor Vehicles:- Every person in the trade are in confusion as to   whether they have to pay GST on sale of motor vehicle even though they have not claimed the ITC on the motor vehicle pertaining to the Restriction on 17(5).  The answer is we have to pay the GST on supply of motor vehicle even though we have not availed the ITC. Government has provided the big relief by way of notifications. We have to analyze this in two scenarios i.e., whether the motor vehicle is purchased before the GST Regime or after the GST Regime.
   1. The Motor vehicle has been purchased before the GST Regime:- As per the Notification No.37/2017 – CGST Rate if the motor vehicle is purchased prior to 01-07-2017 and cenvat credit was not availed, the tax rate is 65% of normal rate.  And as per the Notification No.7/2017 Compensation Cess Rate compensation cess will also be 65% of normal rate only.
   2. The Motor vehicle has been purchased after the GST Regime:- As per the Notification No.8/2018- CGST Rate if the motor vehicle is purchased after 01-07-2017 and ITC was not availed then the gst rates has been reduced considerably on basis of engine capacity and length. And as per the Notification No.1/2018 Compensation Cess Rate compensation cess is not required to pay.

S.No	Engine Capacity	Length	Fuel Type	GST Rate
1.	More than 1,200 cc	4,000 mm or more	Petrol, CNG or LPG	18%
2.	More than 1,500 cc	4,000 mm or more	Diesel	18%
3.	More than 1,500 cc	Popularly Known as SUV		18%
4.	Remaining all other vehicles other than mentioned in Sl. No 1-3			12%

The Value on which the Reduced or Concessional GST rate should be applied is the Margin of supply. Margin of Supply = Transaction Value – Purchase Price.  Purchase price in two different cases is as follows

Purchase Price	Depreciation Provided as per the Income Tax Act	WDV (Written Down Value)
Purchase Price	Depreciation Not Provided as per the Income Tax Act	Original Purchase Price.

If the Margin of Supply is Positive then we have to pay GST on that Value and if the Margin of Supply is Negative then there is no need to pay GST on that supply.

Type of Asset	Transaction Value	Purchase Price	WDV	Margin of Supply	GST Payable on
Depreciable Asset	9,00,000.00	15,00,000.00	7,50,000.00	1,50,000.00	1,50,000.00
Non Depreciable Asset	9,00,000.00	15,00,000.00	7,50,000.00	(6,00,000.00)	NIL
Depreciable Asset	7,00,000.00	15,00,000.00	7,50,000.00	(50,000.00)	NIL
Non Depreciable Asset	7,00,000.00	15,00,000.00	7,50,000.00	(8,00,000.00)	NIL

With the above explanation we can conclude that the GST liability on supply of capital good is dependent on many factors and the misnomer that GST has to be paid only when we avail the ITC is not correct.

“2020 is a year to just be alive and not to think of making any profits, if you are alive in this year then consider that you have made a profit” – Quote by Unknown person.

Discussions to this article

[Rachit Agarwal]

With respect to discussion NIL Consideration, it means that there is no consideration.

If there is no consideration then such activity will not fall within the ambit of Supply u/s 7 of CGST Act, 2017.

Activity will fall within the ambit of Supply of the activity is with relation to persons falling within the ambit of Schedule-1.

Further in my opinion there is no co-relation for charging GST with respect to Written Down Value. WDV is not where used in Section 18(6) of CGST Act, 2017

[SHARAD ANADA]

Notification 08/2018 is applicable to both the cases where motor vehicle purchase before or after 01/07/2017. It shall not apply only if the supplier has availed ITC, CENVAT or VAT credit. If they availed such credit then GST will be applicable as per sec 18(6) of CGST Act 2017. Please refer para 2 of 08/2018.

2. This notification shall not apply, if the supplier of such goods has availed input tax credit as defined in clause (63) of section 2 of the Central Goods and Services Tax Act, 2017, CENVAT as defined in CENVAT Credit Rules, 2004 or the input tax credit of Value Added Tax or any other taxes paid, on such goods.