Section 18(6): Disposal of Capital Goods on Which ITC Was Taken

Section 18 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Sell a machine for less than its written-down value and the accounting loss is the smaller problem. Section 18(6) does not tax the sale — it takes the higher of two numbers, and one of them ignores the sale price entirely.

"As per section 18(6) of CGST Act, in case of supply of capital goods or plant and machinery, on which input tax credit has been availed, the registered person shall pay an amount equal to the input tax credit availed… 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 worked example

(A) ITC to be reversed — "(ITC availed / Max life of the asset in months) × Remaining useful life of the asset in months" = ₹1,80,000 × 24/60 = ₹72,000

(B) GST payable on sale value = ₹3,25,000 × 18% = ₹58,500

Higher of (A) and (B) is the liability — ₹72,000.

Why the formula usually wins

The residual-credit route depreciates the credit on a straight line over 60 months, regardless of what the asset actually fetched. An asset sold cheaply — obsolete plant, a distress sale, a transfer at book value — produces a small (B) and an unchanged (A), so (A) governs.

The reverse case is the asset sold at or near cost, or one that appreciated: (B) then exceeds (A) and the tax follows the transaction value.

Notice what the formula does not contain. There is no reference to the sale price, to accounting depreciation, or to whether the asset is being sold or given away — which is why the Schedule I cross-reference in the Handbook's action points matters. A permanent transfer of business assets without consideration, where credit was availed, is a supply, and there is no transaction value to compute (B) from at all.

The scrap option

"In cases where refractory bricks, moulds and dies, jigs and fixtures are disposed of as scrap, even before the maximum life of asset as envisaged in GST rules, the registered taxpayer may pay tax on the transaction value of such goods determined under section 15."

This is an exception, not a variation. For these four categories the "higher of" test is displaced — transaction value alone suffices — which reflects the fact that they are consumed in the process and their scrap value bears no relation to residual credit. And the word is "may", so it is an option available to the taxpayer.

The provision that is not section 18(6)

Assets that were lost, stolen, destroyed or written off do not go through this computation at all. The Handbook's action point is explicit: "Confirm that capital goods lost / stolen / destroyed / written off were dealt with under Section 17(5)(h) (full reversal) and not erroneously treated under Section 18(6)."

The difference is arithmetical and large. Section 17(5)(h) requires the full credit to be reversed, not the residual portion — there is no 60-month proration. Treating a written-off machine as a section 18(6) disposal understates the reversal by exactly the amount already "used up".

And there is no supply in these cases, which is the underlying reason: section 18(6) is triggered by a supply of capital goods, and destruction or theft is not one.

What the auditor actually does

"Verify whether any capital goods / plant and machinery on which ITC was availed were sold, transferred, scrapped or otherwise disposed of during the year, by reconciling the fixed-asset register / asset retirement schedule with the books and GST returns (including transactions covered by Schedule I, i.e. without consideration)."

Then two documentation points:

• for refractory bricks, moulds and dies, jigs and fixtures disposed of as scrap, "confirm that tax was paid on the transaction value";
• "Verify that the method of reduction adopted is consistently applied and documented in the working papers."

The consistency point is doing real work. Section 18(6) says "reduced by such percentage points as may be prescribed", and the 5% per quarter route in rule 44(1)(b) and the pro-rata route in rule 40(2) can produce different figures. Whichever is used, it should be the same one every year — and the working paper should say which.

Key takeaways

• On a supply of capital goods on which credit was availed, tax is the higher of residual credit and tax on transaction value.
• The residual credit is ITC availed × remaining useful life in months ÷ 60.
• In the Handbook's example, ₹72,000 (formula) beats ₹58,500 (18% on ₹3,25,000).
• The formula ignores the sale price, so assets sold cheaply are governed by (A).
• Refractory bricks, moulds and dies, jigs and fixtures disposed of as scrap may be taxed on transaction value alone.
• Lost, stolen, destroyed or written-off capital goods fall under section 17(5)(h) — full reversal, not section 18(6).
• Schedule I transfers without consideration are within scope even though no sale price exists.
• Reconcile the fixed asset register and retirement schedule against books and returns, and document the method of reduction consistently.

Read next

• Review of Fixed Assets under GST During Finalisation
• Year-End Inventory under GST: Goods in Transit and Job Work
• GST on Discounts, Advances and Sales Promotion Schemes

Disclaimer: Positions stated as on 5 September 2026, based on sections 15, 17(5) and 18(6) of the CGST Act, 2017, Schedule I thereto and rules 40 and 44 of the CGST Rules, 2017, as reproduced in the ICAI Handbook on Finalisation of Accounts with GST Perspective (Second Edition, June 2026).