Last updated: 29 April 2026. When a business sells a capital asset — a machine, a laptop, a car, a piece of office furniture — the transaction is a supply under GST and tax is payable. The trick is the calculation. Section 18(6) of the CGST Act says you pay the higher of (the ITC originally taken on that asset, reduced by 5% for every quarter it was in use) or (the tax on the actual sale price). Most businesses default to charging tax on the sale price and stop there, which is fine in many cases and an underpayment in others. This guide walks through the rule, the formula, the numbers, and the special cases.
Applicability Note: This guide is based on Section 18(6) of the CGST Act, Rule 40(2) and Rule 44(6) of the CGST Rules, Schedule I (Entry 1) and Schedule II (Paragraph 4) of the CGST Act, and Notification 8/2018-Central Tax (Rate). The position stated is as of 29 April 2026. Always verify the current rules on cbic-gst.gov.in or with a GST professional before acting.
Who Should Care?
This guide applies to:
- Manufacturers and traders selling old machinery, plant, or factory equipment
- Service businesses disposing of laptops, office furniture, or company-owned vehicles
- Businesses winding down operations or shifting locations and selling fixed assets
- Companies scrapping or donating used assets where ITC was originally claimed
- Auto dealers and second-hand vehicle dealers disposing of capital-asset cars
1. Is the Sale of a Capital Asset Even a Supply?
Yes, almost always. Under Schedule II Paragraph 4(a) of the CGST Act, where goods that form part of the assets of a business are transferred or disposed of so that they no longer form part of those assets, the transaction is treated as a supply of goods. (The phrase "whether or not for consideration" originally appeared in this paragraph but was omitted by Section 131 of the Finance Act 2020 with retrospective effect from 1 July 2017.) Combined with Section 7(1)(a), this pulls every sale, transfer, or disposal of a fixed asset for consideration into the GST net by default.
Schedule I Entry 1 closes the related loophole. A permanent transfer or disposal of business assets where ITC has been availed is a supply even if there is no consideration. Donating an old machine to a related party, gifting equipment to staff, or scrapping a fixed asset on which ITC was claimed all qualify as supply under this entry. The taxable value in such cases is determined under the GST valuation rules.
One important exemption sits outside this. The transfer of a business as a going concern is exempt under Entry 2 of Notification 12/2017-Central Tax (Rate). A slump sale of an entire undertaking is therefore not the same as selling individual capital assets — different rules apply.
2. The Section 18(6) Higher-Of Rule
For a registered person supplying capital goods or plant and machinery on which input tax credit was taken, Section 18(6) requires payment of an amount equal to the higher of these two values:
| Option | How It Is Calculated |
|---|---|
| (A) ITC reversal route | ITC taken on the asset, reduced by 5% for every quarter or part of a quarter from the date of invoice until the date of supply |
| (B) Tax on transaction value | The applicable GST rate (based on the asset's HSN at the time of sale) applied to the actual sale consideration |
The taxpayer pays whichever is higher. The 5% per quarter reduction is prescribed by Rule 40(2) of the CGST Rules and assumes a useful life of 5 years (20 quarters or 60 months) for capital goods. After 20 quarters in service, Option (A) reduces to nil and Option (B) on the transaction value alone governs.
Rule 44(6) provides an alternative method based on remaining useful life expressed in months (out of 60). It applies in specific contexts such as cancellation of registration or the asset being put to non-business use. For ordinary sale of capital goods during a live registration, Rule 40(2) is the operative provision.
3. A Worked Example
A manufacturer purchased a CNC machine in May 2024 for ₹10,00,000 + ₹1,80,000 IGST (18%). The full ₹1,80,000 ITC was claimed in May 2024. In June 2026, the machine is sold to another business for ₹6,00,000 (excluding GST).
Quarters from invoice date: May 2024 to June 2026 spans 9 full or part quarters (Apr-Jun 2024 part, Jul-Sep 2024, Oct-Dec 2024, Jan-Mar 2025, Apr-Jun 2025, Jul-Sep 2025, Oct-Dec 2025, Jan-Mar 2026, Apr-Jun 2026 part). Total: 9 quarters.
| Step | Calculation | Amount |
|---|---|---|
| Option (A) — Reduction | 5% × 9 quarters = 45% reduction | — |
| Option (A) — Residual ITC | ₹1,80,000 × (100% − 45%) = ₹1,80,000 × 55% | ₹99,000 |
| Option (B) — Tax on sale price | ₹6,00,000 × 18% | ₹1,08,000 |
| Higher of (A) and (B) | Pay this amount | ₹1,08,000 |
The manufacturer pays ₹1,08,000 (Option B). The buyer can claim ₹1,08,000 as ITC on the purchase, subject to fulfilment of all conditions under Section 16 of the CGST Act.
Now flip the sale price. If the same machine is sold for ₹3,00,000, Option (B) becomes ₹54,000 (₹3,00,000 × 18%) and Option (A) at ₹99,000 is higher. The seller pays ₹99,000 even though the invoice shows ₹54,000 of GST. The extra ₹45,000 cannot be recovered from the buyer (the invoice charges 18% on transaction value), so it sits as an additional liability on the seller's GSTR-3B.
4. Special Cases
(a) Capital goods on which no ITC was originally taken
Section 18(6) only fires where ITC was claimed. If you bought a machine before GST registration, or claimed no ITC for any reason (e.g., the supplier was unregistered, the invoice was missed within the Section 16(4) time limit, or the asset was used for fully exempt supplies), the higher-of formula does not apply. The sale is still a taxable outward supply, and GST is payable on the transaction value at the rate applicable to that good's HSN. There is no "no ITC, no GST" exemption for sale of capital assets by a registered person.
(b) Margin scheme for second-hand motor vehicles
Notification 8/2018-Central Tax (Rate) dated 25 January 2018 introduced a margin-based GST on the sale of used motor vehicles held as capital assets, where ITC was not availed at purchase. GST is payable on the margin (sale price minus depreciated value) rather than the full transaction value. The notification applies only to motor vehicles. Other capital goods (machinery, equipment, electronics) cannot use the margin scheme — the standard Section 18(6) higher-of rule applies.
(c) Scrap, write-offs and disposal without consideration
Selling an asset to a scrap dealer is a normal supply at the scrap value (with the higher-of test still running against ITC reduced by 5% per quarter). Writing off an asset in the books without selling it does not by itself trigger GST, but if ITC has been taken and the asset is permanently transferred or destroyed, Schedule I Entry 1 may bring the disposal back as a deemed supply. Document the basis of write-off carefully — physical destruction, insurance write-off, or transfer to a related party each have different GST consequences.
(d) Transfer to a branch or related party
Transfer to a different registration of the same legal entity (e.g., a separate state branch) is a supply between distinct persons under Section 25(4). The Section 18(6) higher-of test applies, with the open market value standing in for transaction value where there is no actual consideration.
5. Reporting in GSTR-1 and GSTR-3B
Sale of a capital asset is reported in GSTR-1 like any other outward supply — in Table 4 (B2B), 5 (B2C inter-state above threshold), or 7 (B2C intra-state and small B2C inter-state), based on the recipient's status and location. The HSN to use is the HSN of the asset itself (for instance, 8458 for a CNC lathe, 8703 for a passenger car, 8471 for laptops).
If Option (A) of the higher-of test exceeds Option (B), the additional liability over and above the tax shown on the invoice has to be discharged in the same GSTR-3B in which the sale is reported. Some taxpayers report this as an additional outward tax liability; others treat the difference as an ITC reversal under Rule 40(2). The end result on the cash ledger is the same. Whichever route is chosen, document the calculation in the working papers — GST audits routinely test the higher-of computation on capital asset sales.
Key Takeaways
- Sale of a capital asset is a supply under Schedule II Paragraph 4(a). Disposal without consideration where ITC was availed is also a supply under Schedule I Entry 1.
- Section 18(6) requires payment of the higher of (a) ITC originally taken, reduced by 5% per quarter from invoice date, or (b) tax on the transaction value at the asset's HSN rate.
- Rule 40(2) prescribes the 5% per quarter reduction. The notional useful life is 5 years (20 quarters). After 20 quarters, only the transaction-value option matters.
- If no ITC was taken on the asset, the higher-of test does not apply, but GST is still payable on the transaction value at the applicable HSN rate. There is no automatic exemption.
- Used motor vehicles held as capital assets without ITC can use the margin scheme under Notification 8/2018-CTR. The scheme does not extend to other capital goods.
- Transfer of a business as a going concern is exempt under Entry 2 of Notification 12/2017-CTR — different from selling individual assets.
- Report the sale in GSTR-1 using the asset's HSN. Discharge any extra liability under Option (A) in the same GSTR-3B as the sale.
Frequently Asked Questions
Do I have to pay GST on sale of capital goods if I never claimed ITC?
Yes, on the transaction value at the applicable GST rate for that good's HSN. Section 18(6)'s higher-of formula does not apply because there is no ITC to reduce, but the sale is still a taxable outward supply by a registered person. The only narrow exception is the margin scheme for second-hand motor vehicles under Notification 8/2018-CTR.
How is the 5% per quarter reduction calculated under Rule 40(2)?
From the invoice date of the capital asset, count each quarter (or part of a quarter) up to the date of supply. Multiply 5% by the number of quarters to get the cumulative reduction percentage, capped at 100% after 20 quarters. Apply that reduction to the original ITC taken to arrive at the residual ITC for the higher-of test.
What if Option (A) is higher than the tax on the sale price — do I still issue the invoice at the sale price?
Yes. The tax invoice is raised at the sale price with GST at the applicable rate, which is what the buyer claims as ITC. The seller separately discharges the extra liability (Option A minus Option B) in the same GSTR-3B, typically as a Rule 40(2) ITC reversal or as additional outward tax. Document the working clearly because it is a common audit query.
Is transfer of a used machine to a sister concern a supply?
Yes, if the two entities have separate GST registrations (different legal persons or distinct persons under Section 25(4)). Schedule I Entry 1 makes it a supply even without consideration if ITC was originally availed. The taxable value is the open market value or the value of like goods, per the GST valuation rules.
What HSN do I use when selling a used capital asset?
The HSN of the asset itself, not a generic "used goods" HSN. A second-hand CNC machine still falls under HSN 8458 and a used company laptop under HSN 8471. The GST rate is the rate applicable to that HSN at the date of sale.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. GST rules are subject to frequent changes through notifications and circulars. Please consult a qualified tax professional or verify the current provisions on the official GST portal (gst.gov.in) before making any compliance decisions.
Have a specific question about selling a capital asset under GST? Our GST experts can help → gstconsultancy.com