Supply of Capital Goods, Goods and Services Tax - GST

[Kaustubh Karandikar]

When capital goods on which input tax credit is claimed are sold or stock transferred to other states, the GST payable is required to be worked out based on provisions under Rule 40(2) or Rule 44(6) of CGST Rules, 2017?

Posts / Replies

[Amit Agrawal]

Relevant 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."

My understanding from above section and rule:

A. One needs to pay GST and need not reverse any ITC as per Section 18 (6) read with Rule 40 (2).

B. Quantum of gst payable is "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 - applies for supply to capital (including between distinct person).

C1. Against supply of capital goods between distinct persons, benefit of second proviso to Rule 28 can be claimed (where available, of course) only for determining "The tax on the transaction value of such capital goods or plant and machinery determined under section 15" and such benefit cannot be claimed for determining "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".

C2. So, one need to be careful while determining liability u/s 18 (6) against supply of capital goods between distinct persons, as merely relying on second proviso to Rule 28 can result into short payment of taxes (i.e. when "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" is higher than 'taxes paid relying on second proviso to Rule 28')

D. 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'.

D1. In my view, calculation of GST payable - as mentioned in Para B - does not apply even when any capital goods is completely destroyed by fire, is beyond salvage and hence, sold as 'scrap' (being only option available). This is because here, what is supplied is 'scrap' and not 'capital goods' per se.

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."

My understanding 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 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.

LASTLY:

There seems an apparent dichotomy between Rule 40 (2) and 44 (6). To avoid disputes / litigation etc. and till better clarity emerges through Board circulars / court rulings, it is better to pay taxes on higher side (i.e. 'Taxes calculated as per Section 18 (6) read with Rule 40 (2)' OR 'Taxes calculated as per Section 18 (6) read with Rule 44 (6)' whichever is higher). This is more so when the buyer is eligible to avail ITC against taxes so charged.

In any case, one needs NOT reverse any ITC as paying taxes against supply - as suggested above - is sufficient & the required compliance with legal provisions in my view.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Kaustubh Karandikar]

Thanks Amit ji for your quick help. I am of the view, more appropriate will be to apply the provisions of Rule 40(2).

[Amit Agrawal]

Dear Shri Kaustubhji, kindly elaborate more on your views explaining why rule 44 (6) should be discarded.

[Kaustubh Karandikar]

Amit ji, Rule 40(2) specifically mentions the wording, "Supply" of Capital goods, which is missing in 44(6) read with 44(1)(b). Your views please sir.

[Amit Agrawal]

Rule 44 (6) specifically states '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 Section 18 (6) only deals with 'Supply of Capital Goods' on which ITC availed.

So, relying on wordings of Rule 44 (1) (b) (which is for 'for capital goods held in stock' and for the purposes of sub-section (4) of section 18 or sub-section (5) of section 29), so to say that 'Rule 44 (6) has got no meaning / implication', is difficult proposition to accept (to my mind, at least).

This is more so, when Rule 44 (6) specifically quotes calculations are for purpose of Section 18 (6) (which deals with 'supply') and also uses the wording 'in the same manner as specified in clause (b) of sub-rule (1)'. So, Rule 44 (6) states & relies on 'manner of calculation u/s 44 (1) (b)' and not relies upon 'situation/s covered u/r 44 (1) (b) per se' in my respectful submission.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I respect contrary views.

[Amit Agrawal]

Correction / improvement in my post at serial number 1 above:

"LASTLY:

There seems an apparent dichotomy between Rule 40 (2) and 44 (6). To avoid disputes / litigation etc. and till better clarity emerges through Board circulars / court rulings, it is better to pay taxes on higher side (i.e. 'Taxes calculated as per Section 18 (6) read with Rule 40 (2)' OR 'Taxes calculated as per Section 18 (6) read with Rule 44 (6)' whichever is higher). This is when the buyer is eligible to avail ITC against taxes so charged.

However, the buyer is not eligible to avail ITC against taxes so charged OR where seller needs to bear taxes as part of his cost & so one, one can pay taxes on lower side (i.e. 'Taxes calculated as per Section 18 (6) read with Rule 40 (2)' OR 'Taxes calculated as per Section 18 (6) read with Rule 44 (6)' whichever is lower). And tax-payer can always defend himself that when there are two methods of calculation given under rules for very same situation (i.e. Section 18 (6)), he can choose any one of them to calculate liability and Dept. cannot force him to choose another.

In any case, one needs NOT reverse any ITC as paying taxes against supply - as suggested above - is sufficient & the required compliance with legal provisions in my view."

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I respect contrary views.

[Kaustubh Karandikar]

thank.s Amit ji for your valuable views

[Shilpi Jain]

Rule 96(10) is the most hastily drafted provision. It has undergone amendments soooo many times!!

So many times, that it would take half day for any person to go through all those notifications to understand.

Then finally relaxation was given for import of capital goods and further relaxation from the restriction was given if the goods were imported by paying IGST + Cess.

There are also Writs challenging this provision which restricts refund in certain scenarios when the statute itself does not give this power.

So in my view, it would not be right to interpret the provision in such a narrow manner but to give it a purposeful interpretation whereby each product has to be analysed separately to check the restriction under this rule.

[Kaustubh Karandikar]

thanks shilpi ji for your advice