1. Quick decision framework
When a company sells an old machine, car, laptop, generator, office furniture or other business asset, do not automatically tax only the accounting profit or apply the second-hand dealer margin scheme. First identify the asset, whether input tax credit (ITC) was taken, whether it is a capital good or plant and machinery, whether the sale is taxable, and whether Section 18(6) creates a minimum amount payable.
Capitalised machine, motor vehicle, computer, furniture, scrap, or trading stock?
Was GST charged and claimed? Was ITC blocked, not claimed, reversed, or partly claimed?
For capital goods on which ITC was taken, compare reduced ITC under Rule 40(2) with GST on transaction value.
Asset register, original invoice, ITC ledger, valuation, buyer details, invoice and delivery evidence.
2. Legal framework: which provisions matter?
| Provision | Practical purpose | Question for accounts team |
|---|---|---|
| Section 7 | Defines scope of supply. | Is the disposal a supply in the course or furtherance of business? |
| Section 15 | Determines transaction value and inclusions. | What is the price actually paid or payable, and are related charges included? |
| Section 18(6) | Special tax calculation for capital goods/plant and machinery where ITC was taken. | Is reduced ITC higher than GST on the sale value? |
| Rule 40(2) | Prescribes reduction of ITC for the Section 18(6) calculation. | How many quarters or parts of quarters have elapsed from the invoice date? |
| Rule 32(5) | Margin scheme for qualifying second-hand goods dealers. | Is the supplier dealing in second-hand goods and was ITC not availed on the purchase? |
| Section 17(5) | Contains blocked ITC provisions, including specified motor vehicles and immovable property-related restrictions. | Was ITC legally available in the first place? |
Read these provisions together with the relevant rate notification and the classification of the asset. A book gain, depreciation schedule or income-tax treatment does not independently decide GST liability.
3. What counts as a capital good?
In GST, capital goods generally refer to goods whose value is capitalised in the books of account of the person claiming ITC and which are used or intended to be used in the course or furtherance of business. The GST definition and the Section 18(6) wording should be applied to the facts, rather than relying only on the fixed-asset ledger label.
Plant and machinery, generators, business computers, office equipment, eligible commercial vehicles and production equipment.
Assets bought without GST, assets purchased from an unregistered person, assets on which ITC was blocked, and assets used partly for non-business purposes.
Land, buildings, intangible rights, and items treated as immovable property may require a different analysis. A capitalised item is not automatically eligible for ITC; first test Section 16 and Section 17.
4. Section 18(6): the higher-of-two calculation
Where capital goods or plant and machinery on which ITC has been taken are supplied, Section 18(6) requires payment of the amount of ITC originally taken reduced by the prescribed percentage points, or tax on the transaction value determined under Section 15, whichever is higher.
- Identify the actual GST ITC taken on the asset, separately by tax head.
- Calculate the reduced ITC amount using Rule 40(2): reduce by five percentage points for every quarter or part thereof from the date of invoice, using the prescribed method.
- Calculate GST on the transaction value of the sale under Section 15.
- Compare the two figures and pay the higher amount, applying the relevant tax heads and reporting mechanism.
Do not confuse this calculation with accounting depreciation or income-tax written-down value. Those figures are not substitutes for the statutory GST calculation.
5. How to count quarters under Rule 40(2)
Rule 40(2) provides the method for reducing the ITC on capital goods for Section 18(6). The reduction is five percentage points for every quarter or part thereof from the date of invoice. The computation should be supported by a clear date schedule and performed separately for CGST, SGST/UTGST and IGST, as applicable.
| Check | Control |
|---|---|
| Starting date | Use the relevant original tax invoice date, not the date the asset was put to use unless the legal rule specifically requires otherwise. |
| Elapsed period | Count quarters or part thereof according to the applicable Rule 40(2) wording and retain the working. |
| Tax-head split | Reconcile the original ITC by CGST, SGST/UTGST and IGST. |
| Comparison | Compare the reduced ITC amount with GST on sale value; the higher amount governs. |
Because the result can depend on the precise invoice and disposal dates, do not use a rough annual depreciation percentage as a substitute. Have the calculation independently reviewed for high-value assets.
6. Is the sale taxable if no ITC was claimed?
Not claiming ITC does not automatically make a business asset sale exempt. A sale by a registered business may still be a taxable supply depending on the nature of the goods and applicable exemption or rate. The special Section 18(6) comparison is tied to ITC having been taken on the capital goods or plant and machinery; where no ITC was taken, determine the ordinary GST liability separately.
Apply Section 18(6) and Rule 40(2), then compare with tax on transaction value.
Do not apply the reduced-ITC limb mechanically; test ordinary output-tax treatment, rate, exemptions and facts.
Keep evidence of why credit was ineligible; still analyse whether the asset sale is taxable.
Do not assume this is identical to blocked ITC. Review the original invoice and actual credit history.
7. Sale of cars, commercial vehicles and other motor vehicles
Motor vehicles need two separate tests: (1) whether ITC was available and actually taken at acquisition, including the exceptions in Section 17(5), and (2) how the sale is taxed. A passenger motor vehicle may have blocked ITC for many businesses, while specified businesses or uses may qualify for exceptions. Commercial goods vehicles may have a different ITC outcome.
For a vehicle on which ITC was taken and which qualifies as capital goods, test Section 18(6). For a vehicle on which no ITC was taken, do not assume that the second-hand margin scheme automatically applies merely because the vehicle is old or sold below its original purchase cost.
8. Scrap, dismantled machinery and unusable assets
When equipment is dismantled and sold as scrap, the classification and factual nature of the supply matter. Do not automatically use the original machinery rate or the margin scheme. Identify what is actually supplied—used machinery, identifiable components, metal scrap or waste—and apply the corresponding classification and rate.
Section 18(6) contains a specific proviso for refractory bricks, moulds and dies, jigs and fixtures supplied as scrap, allowing tax on transaction value for those specified goods. Do not extend that exception to every asset or every scrap sale without legal basis.
- Keep a disposal approval, inspection report, photographs and scrap-weighment records.
- Record whether the asset was sold intact, dismantled, or converted into scrap.
- Use the applicable HSN and rate for the goods actually supplied.
- For capital goods where ITC was taken, evaluate Section 18(6) and its specific proviso.
9. Why Rule 32(5) margin scheme is not a universal shortcut
Rule 32(5) addresses a taxable supply by a person dealing in buying and selling second-hand goods, where the goods are used as such or after minor processing that does not change their nature, and no ITC has been availed on the purchase of those goods. The value is generally the difference between selling price and purchase price; a negative margin is ignored.
| Scenario | Likely approach |
|---|---|
| Used-car dealer buys a used car without ITC and resells it in ordinary course. | Test Rule 32(5) conditions and relevant rate provisions. |
| Manufacturer sells its own old production machine. | Do not assume it is a second-hand goods dealer transaction; examine Section 18(6) and ordinary valuation. |
| Company sells a laptop used by its employee. | Assess normal asset disposal; employee use does not by itself qualify the company for margin scheme. |
| Dealer substantially rebuilds or transforms used goods. | Test whether processing changes the nature of the goods and whether Rule 32(5) remains available. |
The scheme is based on the supplier's business model and the conditions in the rule, not simply the fact that an item is second-hand.
11. Worked examples with solutions
Example 1 — Machine sold after several years
Facts: A machine was purchased for ₹10,00,000 plus GST of ₹1,80,000. The full ₹1,80,000 ITC was taken. It is now sold for ₹3,00,000 plus applicable GST.
Solution: Calculate the reduced ITC amount under Rule 40(2) using the original invoice date and disposal date. Separately calculate GST on ₹3,00,000 under the applicable rate. Compare the two and pay the higher amount under Section 18(6). Do not use book WDV as the statutory figure.
Example 2 — Sale value exceeds reduced ITC
Facts: Reduced ITC under Rule 40(2) works out to ₹36,000. GST on the transaction value is ₹72,000.
Solution: The transaction-value tax is higher, so the comparison results in ₹72,000, subject to correct classification, rate and tax-head allocation.
Example 3 — Reduced ITC exceeds tax on sale
Facts: Reduced ITC works out to ₹95,000 and tax on transaction value works out to ₹54,000.
Solution: The reduced ITC limb is higher. The Section 18(6) amount is therefore ₹95,000, subject to validating the calculation and applicable reporting.
Example 4 — Passenger car where ITC was blocked
Facts: A company bought a passenger car, did not take ITC because Section 17(5) blocked it on the facts, and later sells the car.
Solution: Document the blocked-credit position. Do not apply the Section 18(6) reduced-ITC comparison as if ITC had been taken. Determine ordinary output-tax treatment and applicable rate/exemption separately; do not presume that no ITC means no GST.
Example 5 — Used-vehicle dealer margin scheme
Facts: A registered dealer buys a used vehicle for ₹4,00,000 without ITC and resells it for ₹4,60,000. The dealer is genuinely engaged in buying and selling second-hand vehicles, and all Rule 32(5) conditions are met.
Solution: The margin is ₹60,000 before applying the relevant tax treatment. Confirm that the goods and processing satisfy Rule 32(5), the purchase price is evidenced, and no ITC was availed. This example is not a template for a company selling its own old vehicle.
Example 6 — Machine sold as scrap
Facts: A company sells a machine that has been dismantled and sold as metal scrap.
Solution: Establish the nature of goods supplied and applicable HSN/rate. Review Section 18(6) if ITC was taken. The specific proviso for refractory bricks, moulds and dies, jigs and fixtures supplied as scrap should not be applied to unrelated scrap assets.
Example 7 — Asset sold to a group company below market price
Facts: A company transfers used equipment to a related entity for ₹1,00,000, while comparable market evidence suggests ₹2,50,000.
Solution: Review the related-party valuation rules, including Rule 28 where applicable, and document the commercial reason for the price. Do not rely solely on the accounting WDV or a board-approved price.
Illustrative amounts are for demonstrating the method. Actual tax depends on the asset, ITC history, invoice/disposal dates, classification, applicable rate, related-party status and current law.
12. Invoice, return and accounting treatment
For a taxable disposal, issue the appropriate tax invoice or other document required by the applicable rules. Report the transaction in the relevant outward-supply return and discharge liability through the prescribed return/payment process. The Section 18(6) computation may require a separate working even when the invoice tax is lower than the reduced-ITC amount.
| Record | What it should show |
|---|---|
| Asset sale invoice | Description, quantity, HSN, taxable value, rate, tax, buyer GSTIN where applicable and delivery details. |
| Section 18(6) worksheet | Original ITC by tax head, invoice date, quarter/part-quarter calculation, transaction-value tax and comparison. |
| Books entry | Asset cost, accumulated depreciation, disposal proceeds, GST payable and gain/loss on disposal separately. |
| Return reconciliation | Invoice value/tax reconciled with GSTR-1, GSTR-3B, general ledger and electronic liability records. |
Accounting gain or loss on disposal is not the GST taxable value. Keep the GST working independent from the fixed-asset disposal journal.
13. Documents and audit evidence
- Original purchase invoice and proof of receipt.
- ITC register and electronic credit ledger evidence showing credit actually taken.
- ITC eligibility note where credit was blocked, restricted, reversed or never claimed.
- Fixed asset register with capitalisation date and asset description.
- Approved disposal note, tender/quotation or valuation evidence.
- Sale agreement, tax invoice, delivery challan and buyer confirmation.
- Photographs, inspection report, dismantling record or scrap weighment slip where relevant.
- Rule 40(2) calculation by tax head and reviewer sign-off.
- Related-party valuation memo where the buyer is related or a distinct person.
- GSTR-1/GSTR-3B and ledger reconciliation.
For high-value machinery, create an audit trail that links the original ITC to the final disposal calculation. A bare journal entry or an invoice alone may not explain the Section 18(6) position.
14. Common mistakes to avoid
- Applying Rule 32(5) to every sale of an old company asset.
- Using accounting WDV or income-tax WDV instead of the Rule 40(2) calculation.
- Forgetting the “whichever is higher” comparison in Section 18(6).
- Assuming blocked ITC makes the subsequent sale exempt.
- Assuming that no ITC was claimed means no output GST is payable.
- Using a generic scrap HSN without checking the goods actually supplied.
- Extending the specific scrap proviso to all machinery, all scrap or all capital goods.
- Failing to separate tax on invoice value from any Section 18(6) minimum amount.
- Ignoring related-party valuation where assets are sold to group companies.
- Failing to reconcile the disposal with GSTR-1, GSTR-3B and the fixed-asset register.
15. Month-end disposal checklist
16. Frequently asked questions
1. Is GST payable when a company sells an old machine?
Often the sale is a taxable supply, but the rate and valuation depend on the goods and facts. If ITC was taken on capital goods or plant and machinery, test Section 18(6).
2. Can I pay GST only on the profit or margin?
Not merely because the asset is used. Rule 32(5) is a conditional margin scheme for persons dealing in second-hand goods, not a universal rule for business asset disposals.
3. What if the asset is sold for less than its book value?
Book value does not decide GST. Apply transaction-value rules and, where applicable, the Section 18(6) comparison.
4. What if ITC was never claimed?
Assess ordinary GST on the sale. The reduced-ITC limb of Section 18(6) is linked to ITC taken; absence of ITC does not automatically exempt the sale.
5. What if ITC was blocked under Section 17(5)?
Keep evidence of the blocked-credit reason and determine the ordinary output-tax treatment separately.
6. Does Rule 40(2) use accounting depreciation?
No. It prescribes a GST-specific reduction based on five percentage points for every quarter or part thereof from the invoice date.
7. What if GST on sale value is lower than reduced ITC?
Where Section 18(6) applies, the higher of the reduced ITC amount and tax on transaction value governs.
8. Is every sale of scrap covered by the proviso to Section 18(6)?
No. The proviso names refractory bricks, moulds and dies, jigs and fixtures supplied as scrap. Do not extend it automatically to other assets.
9. Can a manufacturer use the second-hand margin scheme for its old machine?
Not automatically. Check whether the supplier is a person dealing in buying and selling second-hand goods and whether all Rule 32(5) conditions are satisfied.
10. What if the buyer is a group company?
Review the related/distinct-person valuation rules, including Rule 28 where relevant, and retain a pricing rationale.
11. Should the sale appear in GSTR-1?
Taxable outward supplies should be reported in the applicable return tables according to the transaction. Reconcile the reported value and tax with the invoice and books.
12. Does the asset's age alone decide the GST treatment?
No. Age matters to the Section 18(6) reduction, but the result also depends on original ITC, sale value, classification, applicable rate and the legal nature of the transaction.
17. Related GST resources
Browse practical GST articles and compliance guides.
Review credit eligibility when acquiring the asset.
Review Section 17(5) restrictions and exceptions.
This article is educational guidance, not a transaction-specific legal opinion. Verify the applicable CGST/SGST/IGST Acts, Rules, notifications, rate entries and judicial decisions for the relevant tax period before filing.