Selling used plant and machinery, office IT equipment, or industrial vehicles requires careful tax computation. Many businesses make the mistake of simply charging GST on the agreed sale price, assuming that standard outward supply rules apply. However, under the Goods and Services Tax framework, capital assets carry a statutory five-year useful life. When assets are disposed of before completing sixty months of usage, the government claws back a proportional share of the input tax credit originally availed. For ongoing monthly reversals on common capital assets, refer to our guide on ITC reversal Rule 43 capital goods formula and review our breakdown of blocked credit under Section 17(5) with examples.
Statutory provisions under Section 18(6) of the CGST Act
Section 18(6) of the Central Goods and Services Tax Act governs outward supplies of capital assets. The statute mandates that 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. The full text of the law is published on the official repository at Section 18, CGST Act.
The reduction formula is prescribed under Rule 44(6) read with Rule 40(2) of the CGST Rules. The rule establishes that the credit shall be reduced by five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods. The statutory rules are accessible via Rule 44, CGST Rules. In addition, the GST Council and portal procedural instructions provide guidance on return disclosure at GST Council Rules and Amendments and the GST Portal GSTR-3B User Manual.
Common mistake: Discharging tax solely on the depreciated scrap or sale value when selling an asset within two or three years of purchase frequently leads to short payment demands under Section 73 or Section 74, because the reduced ITC amount is often much higher.
Step-by-step formula breakdown
To calculate the statutory amount payable under Section 18(6), follow these chronological steps:
- Determine original ITC availed: Identify the exact amount of CGST, SGST, or IGST originally claimed on the purchase invoice of the asset.
- Count elapsed quarters: Calculate the number of calendar quarters or part quarters between the original purchase invoice date and the sale invoice date. Any fraction of a quarter is counted as a full quarter.
- Compute quarterly reduction: Multiply the number of elapsed quarters by 5 percentage points. For example, 7 elapsed quarters equal a 35% reduction (7 multiplied by 5%).
- Calculate reduced ITC (Amount A): Subtract the total reduction percentage from the original ITC availed. If original ITC was ₹1,00,000 and reduction is 35%, Amount A is ₹65,000.
- Calculate transaction tax (Amount B): Multiply the agreed taxable sale value by the currently applicable GST rate under Section 15.
- Select higher amount: Compare Amount A and Amount B. The higher figure represents the final tax liability that must be discharged.
Special proviso for refractory bricks, moulds, dies, and fixtures
The statute recognises that certain capital goods experience rapid physical deterioration or custom obsolescence. Under the proviso to Section 18(6), where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap or waste, the registered person may pay tax on the transaction value of such goods determined under Section 15.
In our practice advising manufacturing units on asset retirements, this carve-out provides critical relief. Foundries, automotive component producers, and plastic moulders can scrap custom tools without being penalised by the 5% quarterly clawback rule, provided the physical items are genuinely sold as scrap.
Reporting in Form GSTR-1 and Form GSTR-3B
Reporting the transaction depends on whether Amount A (reduced ITC) or Amount B (transaction value tax) is higher:
- Scenario 1: Transaction tax is higher (Amount B > Amount A): Raise a standard tax invoice showing taxable value and GST. Report the outward supply in Form GSTR-1 Table 4 and Form GSTR-3B Table 3.1(a). No separate ITC reversal entry is required.
- Scenario 2: Reduced ITC is higher (Amount A > Amount B): Raise an outward invoice for the transaction value and declare it in GSTR-1 Table 4 and GSTR-3B Table 3.1(a). The incremental difference (Amount A minus Amount B) must be added to tax liability or reported as an ITC reversal in Form GSTR-3B Table 4(B). This ensures the cumulative tax paid matches Amount A.
Worked numerical examples
The following two examples demonstrate both statutory outcomes using realistic rupee figures and exact arithmetic.
Example A: asset sold at loss where reduced ITC is higher
Zenith Engineering purchased a CNC milling machine on 10 July 2024 for ₹12,00,000 plus 18% IGST of ₹2,16,000. Due to a plant reconfiguration, the company sells the machine on 22 October 2026 for ₹5,00,000 plus 18% GST.
- Original ITC availed: ₹2,16,000.00
- Date of purchase invoice: 10 July 2024 (Quarter 2 of FY 2024-25)
- Date of sale invoice: 22 October 2026 (Quarter 3 of FY 2026-27)
- Quarters of usage:
- FY 2024-25: Q2 (Jul-Sep 2024), Q3 (Oct-Dec 2024), Q4 (Jan-Mar 2025) = 3 quarters
- FY 2025-26: Q1 (Apr-Jun 2025), Q2 (Jul-Sep 2025), Q3 (Oct-Dec 2025), Q4 (Jan-Mar 2026) = 4 quarters
- FY 2026-27: Q1 (Apr-Jun 2026), Q2 (Jul-Sep 2026), Q3 (Oct 2026, part counted as full) = 3 quarters
- Total elapsed quarters = 10 quarters
- Reduction percentage: 10 quarters x 5% = 50%
- Reduced ITC (Amount A): ₹2,16,000 minus 50% (₹1,08,000) = ₹1,08,000.00
- Tax on transaction value (Amount B): ₹5,00,000 x 18% = ₹90,000.00
- Comparison: Amount A (₹1,08,000.00) is greater than Amount B (₹90,000.00).
| Calculation Step | Parameter Value | Tax Amount (₹) | Rule Reference |
|---|---|---|---|
| Original Machine Cost | ₹12,00,000.00 | ₹2,16,000.00 | Purchase Invoice (18% IGST) |
| Elapsed Usage Period | 10 Quarters (50% Reduction) | ₹1,08,000.00 | Rule 44(6) (5% per quarter) |
| Reduced ITC (Amount A) | Remaining Credit Value | ₹1,08,000.00 | Section 18(6) First Limb |
| Sale Transaction Value | ₹5,00,000.00 (18% GST) | ₹90,000.00 | Section 18(6) Second Limb |
| Final Tax Payable | Higher of Amount A or B | ₹1,08,000.00 | Statutory Liability |
Zenith Engineering must pay ₹1,08,000.00. The invoice carries ₹90,000.00 outward GST, and the balance of ₹18,000.00 is reversed in Form GSTR-3B.
Example B: asset sold at high value where transaction tax is higher
Prism Logistics purchased a heavy commercial transport chassis on 15 January 2023 for ₹20,00,000 plus 28% GST of ₹5,60,000. On 14 October 2026, the company sells the vehicle to an operator for ₹16,00,000 plus 28% GST.
- Original ITC availed: ₹5,60,000.00
- Elapsed quarters: From January 2023 to October 2026 equals 16 quarters.
- Reduction percentage: 16 quarters x 5% = 80%
- Reduced ITC (Amount A): ₹5,60,000 minus 80% (₹4,48,000) = ₹1,12,000.00
- Tax on transaction value (Amount B): ₹16,00,000 x 28% = ₹4,48,000.00
- Comparison: Amount B (₹4,48,000.00) is greater than Amount A (₹1,12,000.00).
Prism Logistics simply collects and pays ₹4,48,000.00 as standard outward tax in Form GSTR-3B Table 3.1(a). No additional reversal is required.
Related guides
- ITC reversal on sale of used business vehicle: margin scheme versus Section 18(6)
- ITC reversal on goods sent for exhibition abroad not sold: GST rules and Circular 108
- ITC reversal Rule 42 common credit formula: step-by-step calculation and GSTR-3B reporting
- ITC reversal on job work goods not returned under Section 143
Frequently asked questions
What is the statutory formula for ITC reversal on sale of capital goods under Section 18(6)?
Under Section 18(6) of the CGST Act read with Rule 44(6), the registered person must pay an amount equal to the input tax credit taken on the capital goods reduced by 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 determined under Section 15, whichever is higher.
What is the useful life of capital goods considered under GST rules?
Under Rule 44(1)(b) of the CGST Rules, the useful life of capital goods is taken as five years (60 months or 20 quarters) from the date of the invoice.
How is the sale of refractory bricks, moulds, dies, jigs, and fixtures treated?
Under the proviso to Section 18(6), where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap or waste, the registered person may pay tax on the transaction value of such goods determined under Section 15, without needing to compare against reduced input tax credit.
Where is the liability reported in Form GSTR-1 and Form GSTR-3B?
The transaction value and applicable outward tax are reported in Form GSTR-1 Table 4 and Form GSTR-3B Table 3.1(a). If the reduced input tax credit amount exceeds the tax on transaction value, the difference is paid by reversing credit in Form GSTR-3B Table 4(B) or adding to outward tax liability.
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Last checked: 18 October 2026. Sources: Section 18, CGST Act, Rule 44, CGST Rules, GST Council Rules and Amendments, GST Portal GSTR-3B User Manual.