GST on Sale of Capital Goods and Old Vehicles in FY 2025-26: Section 18(6), ITC Reversal and Margin Scheme Explained
Sale of capital goods under GST is not a simple sale-entry transaction. If input tax credit was claimed at the time of purchase, GST law requires a proper comparison between tax on sale value and the remaining eligible ITC. Old and used vehicles have an additional layer because the margin scheme may apply where ITC was not availed. This article explains the law, calculation method, examples, reporting and common mistakes in a practical way for FY 2025-26 and AY 2026-27.
Why GST on Sale of Capital Goods Matters
When a registered person purchases machinery, equipment, furniture, commercial vehicles or other business assets, GST paid on the purchase may be claimed as input tax credit, subject to eligibility. Later, when the same asset is sold, transferred, disposed of or scrapped, the GST law ensures that the taxpayer does not retain excessive ITC benefit.
This is why Section 18(6) of the CGST Act becomes important. It requires a registered person to pay an amount based on a prescribed comparison where ITC was availed on capital goods or plant and machinery. In practical terms, the business must calculate both values and pay the higher amount.
Legal Framework Under GST
1. Section 18(6) of the CGST Act
Section 18(6) applies when a registered person supplies capital goods or plant and machinery on which input tax credit has been taken. The taxpayer is required to pay an amount equal to the higher of the following:
- Input tax credit taken on such capital goods or plant and machinery, reduced in the prescribed manner; or
- Tax payable on the transaction value of such capital goods or plant and machinery under Section 15.
2. Rule 44(6) Read With Rule 44(1)(b)
Rule 44 provides the method for determining ITC attributable to the remaining useful life of capital goods. Useful life is generally taken as five years, meaning 60 months. The ITC attributable to the remaining useful life is calculated on a pro-rata basis.
3. Rule 40(2)
Rule 40(2) also refers to reduction of ITC by five percentage points for every quarter or part thereof from the date of invoice. In practice, taxpayers should maintain a clear working as per the applicable rule position and follow a consistent, supportable approach. For Section 18(6) computations, the pro-rata useful life method under Rule 44(6) is commonly applied for capital goods.
4. Old and Used Vehicles Notification
Old and used motor vehicles are covered by a special valuation mechanism under Notification No. 08/2018-Central Tax (Rate), as amended. From 16 January 2025, the GST rate for old and used vehicles under the margin scheme is effectively 18% in total, subject to conditions.
Sale of Capital Goods Other Than Vehicles
For normal capital goods such as machinery, office equipment, plant, furniture, computers and other fixed assets, the GST treatment depends mainly on whether ITC was availed and whether the asset is sold within its GST useful life of five years.
Case 1: Capital Goods Sold Within Five Years
If capital goods are sold within five years from purchase and ITC was availed, calculate both amounts:
- GST payable on the transaction value of sale; and
- ITC attributable to the remaining useful life.
The higher of the two amounts should be paid.
Example: Machinery Sold After Three Years
Suppose a business purchased machinery for Rs. 10,00,000 plus GST of Rs. 1,80,000. The full GST amount was claimed as ITC. The machinery was used for 36 months and then sold for Rs. 4,00,000. The applicable GST rate on sale is 18%.
| Particulars | Amount / Working |
|---|---|
| ITC availed on purchase | Rs. 1,80,000 |
| Total useful life under GST | 60 months |
| Period used | 36 months |
| Remaining useful life | 24 months |
| ITC attributable to remaining life | Rs. 1,80,000 x 24 / 60 = Rs. 72,000 |
| Sale value | Rs. 4,00,000 |
| GST on sale value at 18% | Rs. 72,000 |
In this example, both values are the same. Therefore, GST liability will be Rs. 72,000.
Case 2: Capital Goods Sold After Five Years
Once the GST useful life of five years is over, the ITC attributable to remaining useful life generally becomes nil. However, the sale of the asset may still be a taxable supply. Therefore, GST on the transaction value should be paid where the asset is taxable and the supplier is registered.
Sale as Scrap
Where capital goods are sold as scrap, GST should generally be paid on the transaction value, subject to the applicable HSN classification and GST rate. The first proviso to Section 18(6) also provides a specific treatment for items such as refractory bricks, moulds and dies, jigs and fixtures when supplied as scrap.
GST on Sale of Old and Used Vehicles
Old and used vehicles require special care because the GST treatment changes depending on whether ITC was availed on the vehicle. Many businesses make mistakes by applying the margin scheme even though ITC was claimed earlier, or by charging GST on full value even when the margin scheme is available.
| Situation | GST Treatment |
|---|---|
| ITC availed on vehicle and sold within five years | Pay higher of GST on transaction value or ITC attributable to remaining useful life. |
| ITC availed on vehicle and sold after five years | ITC reversal amount generally becomes nil, but GST on transaction value may apply. |
| ITC not availed on old/used vehicle | Margin scheme may apply if conditions of Notification No. 08/2018-Central Tax (Rate), as amended, are satisfied. |
| Sale by unregistered individual | Generally outside GST, unless the person is liable to be registered due to business activity. |
Example: Vehicle Sold Within Five Years Where ITC Was Availed
A business claimed ITC of Rs. 1,00,000 on a vehicle. The vehicle is sold after two years, meaning 24 months have been used and 36 months remain out of the total useful life of 60 months.
| Particulars | Amount / Working |
|---|---|
| ITC availed | Rs. 1,00,000 |
| Remaining useful life | 36 months |
| ITC attributable to remaining life | Rs. 1,00,000 x 36 / 60 = Rs. 60,000 |
| Sale price | Rs. 3,00,000 |
| GST on sale value at 18% | Rs. 54,000 |
| Amount payable | Rs. 60,000, being higher than GST on sale value |
Margin Scheme for Old and Used Vehicles
The margin scheme is a special method for computing GST on old and used vehicles where the supplier has not availed ITC or other eligible tax credit on that vehicle. Instead of paying GST on the full sale value, GST is calculated only on the margin.
When Depreciation Was Claimed Under Income Tax
If the registered person claimed depreciation under Section 32 of the Income-tax Act, the margin is generally calculated as:
When Depreciation Was Not Claimed
In other cases, the margin is calculated as:
Example: Margin Scheme Where WDV Is Lower Than Sale Price
A car was purchased for Rs. 8,00,000. ITC was not availed. The written down value as per income tax records on the date of sale is Rs. 3,00,000. The vehicle is sold for Rs. 4,00,000.
| Particulars | Amount |
|---|---|
| Sale consideration | Rs. 4,00,000 |
| WDV on date of sale | Rs. 3,00,000 |
| Taxable margin | Rs. 1,00,000 |
| GST at 18% | Rs. 18,000 |
Example: Negative Margin
If the WDV is Rs. 4,50,000 and the vehicle is sold for Rs. 4,00,000, the margin is negative. Under the margin scheme, such negative margin is ignored. Therefore, GST under the margin scheme will be nil.
GST Return Reporting and Documentation
Correct computation is only one part of compliance. The sale must also be properly documented and reported in GST returns. Poor documentation may create issues during departmental audit, annual return reconciliation or scrutiny.
| Compliance Area | Action Required |
|---|---|
| Tax Invoice | Issue a proper GST invoice for sale of capital goods or old vehicle, wherever applicable. |
| GSTR-1 | Report outward supply details in the relevant table based on B2B or B2C nature. |
| GSTR-3B | Discharge tax liability in the appropriate tax period. |
| Asset Register | Maintain purchase date, invoice number, ITC availed, date of sale and sale value. |
| ITC Working | Keep calculation of remaining useful life and comparison under Section 18(6). |
| Depreciation Schedule | Required especially where margin scheme is used for old vehicles. |
Common Mistakes to Avoid
- Paying GST only on sale value without comparing it with remaining ITC under Section 18(6).
- Applying the margin scheme even though ITC was availed on the vehicle.
- Assuming no GST is payable merely because the asset is old or fully depreciated.
- Using margin scheme for all capital goods. The margin scheme discussed here is specifically relevant for old and used vehicles subject to notification conditions.
- Not maintaining asset-wise ITC records.
- Ignoring GST on sale after five years. ITC reversal may become nil, but taxable sale value may still attract GST.
- Treating negative margin as nil GST even where the margin scheme is not applicable.
- Not matching GST return reporting with books of accounts and fixed asset register.
Quick Summary
| Transaction | Correct GST Approach |
|---|---|
| Capital goods sold within five years and ITC availed | Pay higher of GST on transaction value or remaining ITC amount. |
| Capital goods sold after five years and ITC availed | Remaining ITC amount generally becomes nil, but GST on sale value may apply. |
| Old vehicle sold without availing ITC | Margin scheme may apply; GST generally on positive margin only. |
| Old vehicle sold after availing ITC | Margin scheme not available; Section 18(6) comparison applies where relevant. |
FAQs on GST on Sale of Capital Goods and Old Vehicles
1. Is ITC reversal required every time a capital asset is sold?
No. The Section 18(6) comparison is relevant where ITC was availed on capital goods or plant and machinery. If ITC was not availed, normal GST valuation or special valuation provisions may need to be checked depending on the asset.
2. What is the useful life of capital goods under GST for ITC reversal?
For this purpose, useful life is generally taken as five years, or 60 months, and the ITC attributable to the remaining useful life is calculated on a pro-rata basis.
3. If machinery is sold after five years, is GST payable?
The ITC reversal amount may become nil after five years. However, GST on transaction value may still be payable if the sale is a taxable supply by a registered person.
4. Can the margin scheme be used for old vehicles if ITC was claimed?
No. The old and used vehicle margin scheme is not available where ITC or other eligible tax credit was availed on that vehicle.
5. What happens if sale price is lower than WDV under the vehicle margin scheme?
If the margin is negative under the validly applicable margin scheme, the negative margin is ignored and GST on margin becomes nil.
6. Is GST applicable on sale of an old car by an individual?
A casual sale by an unregistered individual is generally outside GST. However, if the seller is a registered person or the sale is connected with business activity, GST implications should be examined.
7. Where should sale of capital goods be reported?
The sale should be reported in GSTR-1 as outward supply and the tax liability should be paid through GSTR-3B. Books of accounts, fixed asset register and ITC working should also be aligned.
Final Conclusion
GST on sale of capital goods and old vehicles is a calculation-based compliance area. The most important rule is simple: where ITC was availed on capital goods, compare GST on transaction value with the ITC attributable to remaining useful life and pay the higher amount.
For old and used vehicles, first check whether ITC was availed. If ITC was availed, the margin scheme is not available. If ITC was not availed and the notification conditions are satisfied, GST may be payable only on the positive margin instead of the full sale value.
Disclaimer: This article is for educational and informational purposes only. GST law is subject to amendments, notifications, circulars and case-specific interpretation. Please consult your tax advisor before taking any compliance decision.