In short: GST on sale of old machinery is not a question of charging tax on the sale price. Where you claimed input tax credit on the machine, Section 18(6) of the CGST Act makes you pay the higher of two figures: the credit you took reduced on a pro-rata basis, or the tax on the transaction value. Rule 44(6) fixes the first one at the credit taken multiplied by the remaining useful life in months, divided by 60, treating useful life as five years. Sell a machine cheaply in year two and the reversal figure is usually the bigger of the two. Work out both before you agree a price.

An owner who sells a five-year-old machine and raises an invoice with tax on the sale value has done what almost every write-up on the subject tells him to do. On a machine still carrying unused credit, it can also be the wrong number.

The provision is short enough to read in full, and reading it in full is the whole point.

What Section 18(6) actually says

The text is this:

“In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery 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.”

Three things are doing work in that sentence.

It applies to capital goods. Section 2(19) defines those as goods whose value is capitalised in your books and which are used in the course or furtherance of business. A machine on your balance sheet is squarely inside it.

It is triggered by the credit, not by the sale price. The opening condition is that input tax credit has been taken. That is what brings the provision into play.

It ends in “whichever is higher”. This is the part that gets dropped. There are two computations, and the liability is the larger. Anyone who works out only the tax on the sale value has done half the exercise and will be short whenever the other half is bigger.

Working out the first figure

Section 18(6) says the credit is “reduced by such percentage points as may be prescribed”, which sends you to the Rules. Rule 44(6) picks it up and routes the calculation through Rule 44(1)(b):

“for capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on pro-rata basis, taking the useful life as five years.”

So the machine is treated as having a sixty-month life from the invoice, and the credit is spread evenly across it. The credit attributable to the remaining life is:

Input tax credit originally taken × (remaining useful life in months ÷ 60)

The Rule supplies its own illustration, which is worth keeping because it settles the part-month question: capital goods in use for 4 years, 6 months and 15 days have a remaining useful life of 5 months, ignoring the part of the month, and the credit attributable to it is C multiplied by 5 over 60. Part months are ignored, not rounded up.

GST on sale of old machinery: the comparison on a real disposal

Take a machine bought 38 months ago on which you claimed Rs 4,32,000 of input tax credit, now being sold.

Step Working
Useful life under Rule 44 60 months
Months elapsed since invoice 38
Remaining useful life 22 months
Limb one: credit attributable to remaining life Rs 4,32,000 × 22 ÷ 60 = Rs 1,58,400
Limb two: tax on the transaction value Sale price × the rate applicable to the machine
You pay The higher of the two

Now look at what decides the answer. Limb one is fixed the moment you know the date and the credit. Limb two moves with the price you accept. A strong price makes limb two the bigger number and the outcome feels ordinary. A distress sale — a machine going cheap because you need the cash this quarter — pushes limb two down while limb one stays exactly where it is, and the tax bill stops tracking the money you received.

That is the planning point buried in a provision most owners meet only once. The tax consequence of selling early and selling cheap is not proportionate to the price. If you are weighing a disposal against holding the machine another year, the resale side of the decision is set out in the note on resale value on used excavators.

Where it is reported, and what cannot be netted

Rule 44(6) requires the amount to be determined separately for central tax, State tax, Union territory tax and integrated tax. They are four figures, not one pooled number.

The proviso to the same sub-rule handles the reporting: where the amount determined by the reversal method is more than the tax on the transaction value, the amount determined forms part of the output tax liability and is furnished in FORM GSTR-1. So the bigger figure does not sit in a reconciliation somewhere. It goes into the return as output tax.

The tax on the same sale you also have to think about

One disposal, two regimes, and they do not talk to each other.

Section 18(6) is the GST consequence of having claimed credit on the machine. The income-tax consequence runs on entirely different machinery: depreciation, the block of assets, and a gain that is treated as short-term however many years you held it. That side is covered in capital gain on sale of machinery, and the two calculations share no inputs at all.

The credit that starts this whole chain is claimed at the other end of the machine’s life, and how that works is set out in GST input credit on construction equipment. The symmetry is worth seeing: the same credit that reduced your cost on the way in is what the law reaches for on the way out.

The bottom line

Before you shake hands on a price for an old machine, do two sums, not one. Work the reversal figure from the invoice date and the credit you claimed, work the tax on the price being offered, and take the higher. On a machine sold early or sold cheap, the first figure is usually the one that decides it, and discovering that after the invoice has gone out is an expensive way to learn a short provision.

Replacing the machine you are selling? Compare what is currently listed across the excavator range and the backhoe loader range, and look at the finance options before the sale proceeds land, so the replacement and the tax on the disposal are planned in the same conversation.

Rates, thresholds and forms under the GST law change, and the treatment of any particular disposal turns on your own registration position and books. Confirm the figures and the reporting with your chartered accountant before you file. Rates, schemes, specifications and prices change — confirm current terms with the OEM, dealer, bank or insurer before deciding.