Export of Used Capital Goods – Whether ITC Reversal under Section 18(6) Required?

Export of Used Capital Goods – Whether ITC Reversal under Section 18(6) Required?

1. Introduction

GST has now stepped into its ninth year of implementation, progressing towards simplifying indirect taxation and enhancing ease of business. Despite the successful progress, certain issues continue to remain ambiguous and require specific clarification from the Government.

One such issue commonly faced by exporters is the treatment of Input Tax Credit (ITC) when capital goods are exported, on which ITC was originally availed.

Taxpayers generally assume that exports, being zero-rated, should not attract any reversal of ITC, as this would effectively embed tax cost in exports, which is contrary to the principle that ‘tax should not be exported’.

However, the statutory provisions indicate a different outcome when capital goods are involved.

2. Applicability of reversal of ITC on export of capital goods – Section 18(6)

Section 18(6) provides that where capital goods or plant & machinery (on which ITC has been taken) are supplied, the registered person must pay the higher of:

• ITC attributable to the remaining useful life; or
• GST on the transaction value determined under Section 15.

Since export of goods qualifies as “supply” under Section 7, reversal under Section 18(6) technically applies even when exports are made under LUT without payment of IGST.

An associated ambiguity persists in the computational mechanism — whether reversal should follow Rule 40(2) or Rule 44(6), as both prescribe different methods. This remains unclarified and is a subject matter of discussion altogether.

Accordingly, despite the capital goods being exported, reversal under Section 18(6) is attracted.

3. Whether zero-rating under Section 16 of the IGST Act overrides Section 18(6) of the CGST Act

At this juncture, it is pertinent to note whether zero-rating as per Section 16 of the IGST Act overrides reversal of ITC as per Section 18(6) of the CGST Act 2017.

Zero-rated supplies under Section 16 of the IGST Act deal with output liability, i.e., export without payment of tax or with IGST, and do not specifically exclude the reversal under Section 18(6).

Hence, Section 16 of the IGST Act does not expressly override Section 18(6) of the CGST Act. Thus, on a plain reading, zero-rating does not exclude the taxpayer from the reversal/payment mandated under Section 18(6).

Further, while Section 16(2) states that ITC on zero-rated supplies shall be available notwithstanding the supply being an exempt supply, it does not specifically exempt the reversal required under Section 18(6) on export of capital assets.

While one may argue that any reversal leading to embedded tax cost contradicts the concept of zero-rating, such an interpretation currently lacks explicit legislative support. With no judicial guidance yet, this remains an open interpretational area.

Hence, most taxpayers willingly reverse the ITC to avoid future disputes and to remain compliant.

4. Conclusion

While policy principles support the view that exports should not carry any embedded tax cost, the statutory language directs mandatory reversal if the capital goods are exported within a period of five years from purchase.

A clarification on the applicability of Section 18(6) to exports would help resolve this interpretational gap.

This note is meant only for academic discussion and to facilitate exchange of views, and i would really like to hear your thoughts.

The view expressed above is strictly individual and not the view of any organization.