Selling a Capital Good: Section 18(6) and Rule 44(6)

Selling a Capital Good 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.

A company sells a five-year-old machine for ₹3 lakh. It bought the machine for ₹50 lakh and took ₹9 lakh of credit. What GST does it pay on the sale?

Not 18% of ₹3 lakh. The answer is the higher of two figures, and which one wins depends on how far into the asset's life the sale falls.

Section 18(6): on supply of capital goods or plant and machinery on which credit was taken, the registered person shall pay an amount equal to the credit taken, reduced by such percentage points as may be prescribed, or the tax on the transaction value determined under s.15, whichever is higher. Rule 44(6) prescribes the reduction: five percentage points for every quarter or part thereof from the date of issue of the invoice for the capital goods. A refractory brick, mould, die, jig or fixture supplied as scrap is the exception — tax on the transaction value alone.

The two amounts

Amount A — the depreciated credit.

Credit taken × (remaining useful life ÷ 60 months), computed as credit taken less 5 percentage points per quarter or part thereof since the invoice date.

Amount B — tax on the transaction value.

The ordinary s.15 value multiplied by the applicable rate.

Pay the higher.

Worked examples

Machine bought April 2022 for ₹50,00,000 + ₹9,00,000 GST. Sold October 2026 for ₹3,00,000.

Quarters elapsed: April 2022 to October 2026 ≈ 18 quarters. Reduction: 18 × 5 = 90 percentage points. Amount A = ₹9,00,000 × 10% = ₹90,000. Amount B = ₹3,00,000 × 18% = ₹54,000.

Higher: ₹90,000. The company pays ₹90,000, not ₹54,000.

Same machine sold October 2028 — 26 quarters, so the reduction exceeds 100 points and Amount A is nil. Amount B = tax on the sale value.

Higher: Amount B. After twenty quarters — five years — only the transaction value test remains.

Machine bought April 2026, sold April 2027 for ₹40,00,000. Quarters: 4. Reduction 20 points. Amount A = ₹9,00,000 × 80% = ₹7,20,000. Amount B = ₹40,00,000 × 18% = ₹7,20,000. Equal here — but move the sale price to ₹30 lakh and Amount A wins.

Why the higher-of test exists

Without it, a business could take full credit on an asset, use it for two years, and sell it to a related party or into scrap at a nominal price — paying tax on the nominal price and keeping the rest of the credit.

The depreciated-credit floor removes that. It says: you may keep the credit for the period you actually used the asset, and no more.

The 5-points-per-quarter convention is the same one used in Rule 43 on change of use, in Rule 40(1)(a) for capital goods credit on transition into the regime, and in Rule 44(1)(b) for reversal on composition or exemption. Twenty quarters at five points is one hundred — the same five-year useful life.

The scrap exception

The proviso to Rule 44(6): where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value determined under s.15.

Only those five categories, and only where supplied as scrap. A mould sold as a working mould is on the ordinary higher-of test.

What counts as "capital goods on which credit has been taken"

Section 18(6) applies where input tax credit has been taken on the capital goods or plant and machinery. Two consequences:

No credit taken, no s.18(6). An asset bought before registration, or one on which credit was blocked under s.17(5), is sold on ordinary s.15 valuation with tax at the applicable rate. This is why the sale of a motor vehicle on which credit was blocked is not caught by s.18(6) — and why the margin scheme under Rule 32(5) or the specific notification for used vehicles may apply instead.

Partial credit. Where credit was taken and partly reversed under Rule 43, the "credit taken" for s.18(6) is the amount originally credited, and the working should reconcile to the Rule 43 register.

Practical notes

• Maintain a capital goods register with invoice date, credit taken and quarters elapsed. Both amounts are computed from it.
• Compute both amounts on every disposal, including scrap sales and write-offs on transfer.
• Count part quarters as full quarters. "Every quarter or part thereof" rounds up.
• Issue a tax invoice for the higher amount. The document is an invoice, not a credit reversal entry.
• Transfer of a business as a going concern is a different case — s.18(3) and ITC-02 apply, and the assets move with the credit rather than being sold.
• Write-off without sale is not s.18(6). Goods written off are caught by s.17(5)(h), and the credit is reversed in full.

Key takeaways

• s.18(6): pay the higher of the depreciated credit and the tax on the transaction value.
• Rule 44(6): credit reduced by 5 percentage points per quarter or part thereof from the invoice date.
• After twenty quarters, the depreciated credit is nil and only the transaction value test applies.
• Refractory bricks, moulds, dies, jigs and fixtures sold as scrap — transaction value only.
• No credit taken means no s.18(6); ordinary valuation applies.
• Write-off without sale is s.17(5)(h), not s.18(6).

Read next

• Rule 43: Capital Goods and the Sixty-Month Rule
• ITC on Capital Goods: Rules, Depreciation and Reversal
• Section 18(4): Reversal on Opting Into Composition or Exemption
• GST on Sale of Used and Second-Hand Goods

Disclaimer: Positions stated as on 5 September 2026, based on the CGST Act and Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition).