Sale of Old plant & Machinery on which ITC Taken earlier-Rule 40 or Rule 44

[ROHIT GOEL]

Hi Sir,

As per sec 18(6) of CGST Act 2017, when capital goods on which ITC has been taken are sold, then the assessee should pay:

a) ITC taken earlier after reduction of prescribed percentage points OR

b) tax on transaction value on sale

whichever is higher.

Further as per Rule 40(2) of CGST Rules:

'(2) 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.'

However, Rule 44 also states that:

'(1) The amount of input tax credit relating to inputs held in stock, inputs contained in semi-finished and finished goods held in stock, and capital goods held in stock shall, for the purposes of sub-section (4) of section 18 or sub-section (5) of section 29, be determined in the following manner, namely,-

........(b) for capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on 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 taken on such capital goods= C

Input tax credit attributable to remaining useful life= C multiplied by 5/60

(6) 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 subrule (1) and the amount shall be determined separately for input tax credit of ³[central tax, State tax, Union territory tax and integrated tax]'

My query is which Rule is to be followed in such case? Whether the credit to be reversed or paid will be determined as 5% per quarter or on the basis of useful life of 60 months since there will be differences in both of the two methods?

[Alkesh Jani]

Sir,

In my point of view, in your case Rule 40(2) of CGST Rules, 2017 is applicable, as it is with regards to Section 18(6), while Rule 44 is with regards to Section 18(4) of the Act.

Further, Please confirm that date of Invoice of Capital goods and if the capital goods are 60 months old, than GST is payable on transaction value. Moreover, if the goods are less than 60 months old, than value shall be calculated by 5 point per quarter or part thereof, ITC shall be reverse or to be paid for the depreciation and if the transaction value is higher than transaction value is to be taken into account and GST is to be paid on such transaction value or on depreciated value, whichever is higher.

Our experts may correct me if mistaken.

Thanks

[ROHIT GOEL]

Sir,

I agree with the part that Rule 44 is specified for Sec 18(4). But Sub rule 6 states the following:

"(6) 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 subrule (1)and the amount shall be determined separately for input tax credit of ³[central tax, State tax, Union territory tax and integrated tax]"

Therefore as per above, rule 44 is also prescribing method of calculation of ITC to be reversed in case of sec 18(6) as well. That is the only reason for our confusion.

AI Summary

Input tax credit reversal on capital goods: determine method under the applicable GST rule, affecting depreciated credit versus transaction value. Dispute concerns which method governs reversal of input tax credit when capital goods are sold under section 18(6): Rule 40(2) prescribes reduction of credit by five percentage points per quarter from invoice date, while Rule 44(1)(b) and subrule (6) set a pro rata computation based on a sixty month useful life and appear to apply that method to section 18(6), creating an inconsistency as to whether the quarterly depreciation method or the sixty month pro rata method controls.