16 May 2019

ITC reversal on sale of used capital goods

By Tushar Mittal

GST law is moving towards its second anniversary and yet the so called simple tax does not seem to have settled down much. Every other day some new issues also arise which more often leave the taxpayers in implementational deadlock. Thus far, we all have come across various issues which prominently arose because GST law was silent on such issues. However, in this article, we will discuss about one peculiar issue which has been catered not by one but by two separate provisions in the law leading to ambiguity and implementational complexity for the taxpayers.

Section 18 of the CGST Act, 2017 contains the provision regarding availability of credit in special circumstances, of which sub-section (6) refers to the case where the registered person who is selling the capital goods after use, on which he has taken input tax credit, shall pay an amount equal to the input tax credit taken on the said capital goods reduced by such percentage point as may be prescribed (in the CGST Rules, 2017) in this regard or pay the tax on the transaction value of such capital goods or plant and machinery determined as per Section 15, whichever is higher.

In CGST Rules, there are two provisions which refer to the above-mentioned Section 18(6) and prescribes the method for calculating the input tax credit for the said purpose. First method is prescribed under Rule 40(2) of the CGST Rules which states that input tax credit in the case of supply of capital goods and plant and machinery shall be calculated by reducing five percentage point for every quarter or part thereof from the date of issue of invoice. This appears to be a simple and straight forward prescription or formula for determining the quantum of ITC which requires to be reversed when used capital goods are disposed.

Further Rule 44(6) read with Rule 44(1)(b) of the CGST Rules also prescribes the method of determining an amount for the purpose of Section 18(6), by stating that input tax credit involved in the remaining useful life in months shall be computed on pro rata basis, taking useful life as five years. These two provisions tend to produce different results when quantum of ITC reversal is computed. Let us understand this issue with the help of an example.

Suppose, Mr. X sold his machinery for Rs. 1,44,550/- (inclusive of GST at the rate of 18% of Rs. 22,050/-) on 10.05.2019 which he purchased on 01.07.2017 for Rs. 2,36,000/- (inclusive of Rs. 36,000/- as GST @ 18%).

As per Section 18(6) of the CGST Act, Mr. X has to pay an amount equivalent to higher of the following:
  1. an amount equal to the GST levied on transaction value on supply (sale) of the machinery, that is of Rs. 22,050/-, or
  2. An amount of input tax credit as reduced by such percentage point as prescribed under the rules:
As per Rule 40(2), the amount to be determined is as follows: As per Rule 44(6) read with Rule 44(1)(b), the amount to be determined is as follows:
  • Machinery has been used for total 1 year, 10 months and 10 days which constitute 8 quarters.
  • Percentage amount to be reduced:
     8 quarters x 5% = 40%
  • The amount to be considered =
     36000- (36000 x 40%) = Rs. 21,600/-
  • Amount payable (ITC to be reversed / Output liability) = Rs. 22,050/-
(Being higher of Rs. 22,050/- and Rs. 21,600/-)
  • Machinery has been used for total 1 year, 10 months and 10 days which constitute 23 months.
  • Useful life left for use (according to CGST rules) is 37 months
  • The amount to be considered:
36000 x (37/60) = Rs. 22,200/-
  • Amount payable (ITC to be reversed / Output liability) = Rs. 22,200/-
(Being higher of Rs. 22,050/- and Rs. 22,200/-)

From the above illustration, it is evident that the two provisions provide two different results. However, if we go strictly by the phrase used in Section 18 (6), provisions of Rule 40(2) seems more appropriate as it prescribes a method of determining the input tax credit with reduction in the percentage point unlike the pro rata basis as mentioned in the other rule. But the department may adopt the provision which is more beneficial to it and may demand credit reversal / amount payable as per Rule 44(6). If such interpretation is adopted, taxpayers (sellers) will have to take the hit of incremental liability on himself in such instances. Besides this, it will also prejudice the subsequent buyer as he will only be entitled to avail the input tax credit to the extent of GST calculated on the transaction value i.e., Rs. 22,050/- as mentioned in the supply invoice used for disposal of used capital goods whereas, the government will get tax revenue of Rs. 22,200/-.

It appears there exists incongruency between the two provisions prescribing two different formula and hence, cannot be implemented together leaving taxpayers in a fix as to which provision is to be adopted. Hence, it is desirable that appropriate clarification is issued by the CBIC.

[The author is an Associate, GST Practice, Lakshmikumaran and Sridharan, New Delhi]

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