Guide to Capital Goods under GST – Credit, Reversal, Sale, Loss, and Reporting

By CA Surekha S Ahuja

Introduction: Why Capital Goods Require Special Attention

In GST compliance, capital goods are not a one-time event—they demand lifecycle tracking. Businesses can claim full input tax credit (ITC) upfront, but the law expects tax neutrality to be maintained until the asset is finally:

• Sold

• Scrapped

• Destroyed

• Permanently removed from business use

Most GST disputes on capital goods arise not from legal ambiguity, but from missed reversals, incorrect valuation at the time of sale, or misreporting in annual returns (GSTR-9/9C). A disciplined approach ensures smooth audits, accurate ITC management, and minimal risk of penalties.

Capital Goods Definition & ITC Eligibility

• Capital goods: Assets capitalized in books providing enduring business benefit. GST follows accounting character and economic substance, not just invoice description.

• Repairs/maintenance: Restorative expenditure that does not improve/upgrade the asset is treated as repair, not capital goods, and does not trigger reversals.

Eligibility under Section 16 CGST Act:

• ITC allowed if goods are used/intended for business and invoice, receipt, tax payment, and return filing conditions are satisfied.

• Full ITC can be claimed in the year of purchase; spreading over useful life is not required.

• Caution: GST component must not be capitalized for income-tax depreciation—doing so permanently blocks ITC.

When ITC Is Blocked or Denied (Section 17(5))

• Assets used for personal purposes, immovable property on own account, or certain motor vehicles

• Blocked at inception → no ITC available, even if later sold

Exempt or Mixed Supplies (Section 17(2) & Rule 43)

• Partial/complete use for exempt supplies → proportionate ITC reversal

• Rule 43: Monthly, asset-wise reversal over 60 months

• Repairs excluded

• Rule 44(6): 5% per quarter reduction method commonly used for sales or disposal

Reverse Charge on Capital Goods (Sections 9(3)/9(4))

• GST under reverse charge must be paid in cash and reported in GSTR-3B Table 3.1(d)

• ITC available once paid (Section 16 conditions apply)

• Subsequent sale/disposal treated like forward-charge goods

Sale, Disposal, Scrap, or Permanent Removal (Section 7 & 18(6))

• Always a taxable supply, regardless of age or book value

• GST liability = higher of:

  1. Tax on transaction value (Section 15)

  2. ITC attributable to remaining useful life

• Remaining ITC: Original ITC × reduction (5% per quarter, Rule 44(6))

• Applies even if sold in same financial year

Accounting loss or WDV does not reduce GST liability; paying GST only on sale price is a common audit trigger.

Loss, Destruction, Theft, or Write-off

• ITC on destroyed/lost/stolen/written-off capital goods must be reversed (Section 18(6) + Rule 44(6))

• No sale consideration required

• Frequently missed reversal during audits

Insurance Claims

• Compensation is not a supply → no GST

• Exit of asset → ITC reversal mandatory

• Reversal required even if insurance proceeds received

Step-by-Step GSTR Reporting Guide

Event	GSTR-1	GSTR-3B	GSTR-9	GSTR-9C
Sale of capital goods	B2B/B2C	Table 3.1	Taxable turnover	Reconciling item
ITC reversal (Rule 43/18(6))	—	Table 4(B)	Report separately	Reconciling item
Reverse charge	—	Table 3.1(d)	Report if applicable	Reconciling item

Tips:

• Same-year sales → calculate remaining ITC using Rule 44(6)

• Reverse ITC for loss, destruction, insurance claims even if no sale consideration

• Misplacement in GSTR-9C = audit trigger

ITC Reversal Checklist – Insurance, Loss, and Disposal

1. Insurance Claims: Reverse ITC; GST not applicable

2. Loss/Theft: Reverse ITC; maintain asset register & proof

3. Sale/Disposal/Scrap: Compare GST on sale vs. remaining ITC; pay higher

4. Exempt/Mixed Supply: Monthly Rule 43 reversal till 60 months or disposal

5. Documentation: Asset register, ITC calculations, invoices, insurance claims, destruction proofs

Numerical Illustrations

1. Sale after 3 Years (12 Quarters)

• Purchase: ₹10,00,000 + GST 18% (₹1,80,000)

• Sale: ₹4,00,000

• Remaining ITC: 40% × ₹1,80,000 = ₹72,000

• GST on sale: 18% × ₹4,00,000 = ₹72,000

• GST payable = ₹72,000

2. Sale Same Year (1 Quarter)

• Remaining ITC: 95% × 1,80,000 = ₹1,71,000

• GST on sale = ₹90,000 → Pay higher = ₹1,71,000

3. Destruction w/ Insurance (2 Years)

• Remaining ITC = 60% × 1,80,000 = ₹1,08,000

• Reverse ITC = ₹1,08,000; GST = NIL

4. Exempt Supplies

• ITC: ₹1,20,000

• Monthly Rule 43 reversal = ₹2,000

• Continue till 60 months or disposal

Common Errors & Audit Triggers

• Claiming depreciation on GST

• Ignoring Rule 43 reversals

• Missing reversals on loss, destruction, or insurance claims

• Paying GST only on sale price

• Misreporting in GSTR-3B/9/9C

Result: Interest, penalties, and compliance failures

Professional Insights & Best Practices

GST on capital goods is lifecycle-based, not punitive. Full ITC upfront is allowed, but businesses must:

• Track asset usage and lifecycle

• Ensure timely ITC reversals

• Maintain accurate GSTR-3B, 9, 9C reporting

• Keep detailed supporting documentation

Outcome: Businesses aligning accounting, monthly filings, and annual reconciliations rarely face disputes and audit challenges.

Conclusion

Capital goods under GST require strategic lifecycle management. Proper understanding of ITC eligibility, reversals, sale/disposal, insurance treatment, and reporting not only ensures compliance but also protects businesses from audit disputes and penalties.

By following a structured approach—from purchase to exit—businesses can maximize tax benefits while maintaining full legal compliance. This comprehensive framework makes GST on capital goods a manageable and predictable process, turning what is often a compliance challenge into an operational advantage.