When a registered business sells a used machine, a DG set, a server or any other capital asset on which it took GST input tax credit, the GST it owes is not simply the rate applied to the sale price. Section 18(6) of the CGST Act makes the seller pay the higher of two figures: the credit originally taken, cut by five percentage points per quarter held, or the tax on the actual sale price. Sell an asset early or cheaply and the first figure usually wins, which means part of the GST becomes a cost the seller absorbs.
The calculation takes ten minutes once you have three facts in hand: the purchase invoice date, the credit actually taken on that asset under each tax head, and the agreed sale price. The rest of this page walks through the test, a worked sale from October 2026, the cases where the rule does not apply at all, and how to report the figure.
The two numbers section 18(6) asks you to compare
The provision covers a supply of capital goods or plant and machinery on which input tax credit has been taken. The seller pays the credit taken, reduced by the prescribed percentage points, or the tax on the transaction value under section 15, whichever is higher. The current text is in the CGST Act as compiled by ICAI with amendments up to the Finance Act, 2025. ICAI's Indirect Taxes Committee also keeps the Act, the Rules and later amendments together on its CGST law page.
- Figure A, reduced credit: the input tax credit taken on that asset, minus five percentage points for every quarter or part of a quarter since the purchase invoice date.
- Figure B, tax on transaction value: the GST rate that applies to the goods on the date of sale, applied to the price agreed with the buyer. For an unrelated buyer where price is the only consideration, this is the invoice value.
You pay whichever is larger. If Figure B is larger, nothing unusual happens: you charge GST on the invoice as you would on any sale. If Figure A is larger, the difference is extra output tax that the buyer will not see on the invoice and cannot claim as credit.
How Rule 40(2) cuts the credit, quarter by quarter
The percentage points are prescribed in Rule 40(2) of the CGST Rules (see the current CGST Rules compilation hosted by ICAI). For capital goods or plant and machinery supplied under section 18(6), the input tax is reduced at five percentage points for every quarter or part thereof from the date of the invoice for those goods. Twenty quarters bring the reduction to 100%, so once the purchase invoice is more than five years old, Figure A is nil and only the tax on the sale price matters.
Two details catch people out. The clock runs from the purchase invoice date, not the date the asset was put to use or capitalised. And a part quarter counts as a whole one, so an asset sold a few days into its tenth quarter takes ten quarters of reduction.
The table below shows how Figure A falls for an asset on which ₹3,60,000 of credit was taken. The last column is the sale price (at 18%) at which Figure B overtakes Figure A. Sell below that price and the seller pays Figure A anyway; sell above it and normal GST on the invoice covers the liability. All figures are illustrations.
| Quarters since purchase invoice (including a part quarter) | Reduction | Figure A (reduced credit) | Sale price at which 18% GST equals Figure A |
|---|---|---|---|
| 4 | 20% | ₹2,88,000 | ₹16,00,000 |
| 8 | 40% | ₹2,16,000 | ₹12,00,000 |
| 9 | 45% | ₹1,98,000 | ₹11,00,000 |
| 12 | 60% | ₹1,44,000 | ₹8,00,000 |
| 16 | 80% | ₹72,000 | ₹4,00,000 |
| 20 or more | 100% | Nil | Any price; only Figure B applies |
The break-even column is the practical one. Before you agree a price for a two-year-old machine, check whether the offer is below the break-even figure, because the GST cost to you does not drop with the price below that point.
Worked example: a CNC machine sold in October 2026
Illustration. A Pune manufacturer bought a CNC machine on an invoice dated 18 July 2024 for ₹20,00,000 plus CGST ₹1,80,000 and SGST ₹1,80,000. It capitalised the machine at ₹20,00,000 and took the full ₹3,60,000 as credit. On 12 October 2026 it sells the machine to an unrelated buyer in Maharashtra for ₹6,50,000. Assume the machine attracts GST at 18% on the date of sale.
- Count the quarters. Quarters run 18 July to 17 October, 18 October to 17 January, and so on. Eight full quarters end on 17 July 2026. The sale on 12 October 2026 falls inside the ninth quarter, so the count is 9.
- Work out Figure A. 9 × 5 = 45 percentage points. The remaining 55% of ₹3,60,000 is ₹1,98,000 (CGST ₹99,000 and SGST ₹99,000).
- Work out Figure B. 18% of ₹6,50,000 is ₹1,17,000 (CGST ₹58,500 and SGST ₹58,500).
- Take the higher. ₹1,98,000 exceeds ₹1,17,000, so the section 18(6) liability is ₹1,98,000.
- Find the cost to the seller. The buyer pays and can claim credit only for the tax charged to it, ₹1,17,000. The balance of ₹81,000 comes out of the seller's pocket.
Change one fact and the picture flips. If the buyer pays ₹12,50,000, Figure B is ₹2,25,000, which is above ₹1,98,000. The seller charges ₹2,25,000 on the invoice and section 18(6) costs nothing extra. That is why the break-even price of ₹11,00,000 in the table is worth knowing before the sale is negotiated.
Cross-checking with Rule 44(6)
A second rule also speaks to section 18(6). Rule 44(6) of the CGST Rules says the credit for section 18(6) is determined in the same manner as Rule 44(1)(b). That clause works out the credit for the remaining useful life in months, pro-rata, taking useful life as five years. It adds that the amount is determined separately for central tax, State tax, Union territory tax and integrated tax. Its proviso says that where this amount exceeds the tax on the transaction value of the capital goods, it forms part of the output tax liability and is furnished in Form GSTR-1.
On the CNC machine, 18 July 2024 to 12 October 2026 is 26 full months and 24 days. Treat the part month as used and 33 months of the 60 remain: ₹3,60,000 × 33 ÷ 60 = ₹1,98,000, the same as Rule 40(2). Count only the 26 complete months and 34 remain, giving ₹2,04,000. Neither rule says it overrides the other, and quarter-rounding and month-rounding can produce different answers on other dates. Work out both, keep the working in the file, and be ready to explain the figure you paid.
When section 18(6) does not apply at all
The section works only on capital goods or plant and machinery on which credit has been taken. Before you run any numbers, rule out these situations, because each of them sends you straight to normal GST on the sale price.
- Credit was blocked or not claimed. A motor car whose credit fell under section 17(5), or an asset where the business simply never took credit, has nothing to compare. GST is charged on the transaction value. The categories are set out in the note on blocked ITC under section 17(5).
- Depreciation was claimed on the GST portion. Section 16(3) bars credit on the tax component of capital goods where depreciation on that component has been claimed under the Income-tax Act. If the fixed asset register carries the GST inside the asset cost and depreciation was claimed on it, credit was not validly available. Check the register before assuming credit was taken.
- The item was never capitalised. Section 2(19) defines capital goods as goods whose value is capitalised in the books of the person claiming credit and which are used, or intended to be used, in the business. A printer expensed through the profit and loss account is not a capital good for this purpose, even if it lasts several years.
- The purchase invoice is more than five years old. Twenty quarters have run, Figure A is nil and only the tax on the sale price remains.
Dealers in second-hand goods sometimes ask whether they can pay tax only on their margin. Rule 32(5) allows value to be taken as the difference between selling price and purchase price, but only where no input tax credit was availed on the purchase. A business selling its own asset on which it took credit is outside that rule and back under section 18(6).
Moulds, dies, jigs and refractory bricks sold as scrap
The proviso to section 18(6) gives one relief. Where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of those goods. A foundry scrapping worn dies after eighteen months therefore pays GST on the scrap price, without comparing it to the reduced credit. The relief is limited to those named items and to a supply as scrap; a working die sold to another manufacturer is a normal section 18(6) case.
Assets given away or used partly for exempt supplies
Paragraph 1 of Schedule I to the CGST Act treats the permanent transfer or disposal of business assets on which input tax credit has been availed as a supply even when no consideration is received. Handing an old laptop to a departing employee free of charge, or donating used furniture on which credit was taken, is therefore a taxable event. With no price, Figure B rests on the valuation rules for supplies without consideration, and the reduced-credit figure under section 18(6) still sets the floor. Run the same comparison and keep the working.
Capital goods used partly for exempt supplies carry only part of their credit. Rule 43 spreads common credit on capital goods over a five-year life and reverses the exempt share. ICAI's background material on input tax credit sets out that mechanism, and the Rule 42 vs Rule 43 calculation shows it with numbers. Section 18(6) works on the credit taken, so start Figure A from the amount actually credited to the ledger for that asset, not the full tax on the purchase invoice.
Invoicing and reporting the sale
Raise a normal tax invoice at the agreed price, with the GST that applies to that price; the tax invoice checklist covers the particulars. Report the sale in GSTR-1 like any other outward supply. Where Figure A is higher, the proviso to Rule 44(6) makes the excess part of your output tax liability and points to GSTR-1 for furnishing it, and the tax is then paid through GSTR-3B. The rules do not prescribe a separate document for that excess, so decide your method before the period closes and apply it consistently. How the two returns tie together is explained in GSTR-1 vs GSTR-3B reconciliation.
Settle the commercial terms before the invoice goes out. If the buyer agrees to bear the extra ₹81,000 in the example, that payment is part of the consideration and raises the transaction value, which changes Figure B. Treat it as a price revision rather than a side reimbursement.
Where the heads do not line up, take care. A machine bought on an IGST invoice and sold within the State produces Figure A in IGST and Figure B in CGST and SGST. Rule 44(6) asks for the amount to be determined head by head, so record each head separately in the working rather than netting a single total.
Finally, keep a one-page disposal note for each asset sold: purchase invoice number and date, credit taken under each head, sale date and price, quarter count, the Rule 40(2) and Rule 44(6) figures, tax on the transaction value and the amount actually paid. Tie it to the fixed asset register and the income-tax block of assets in the same period, so that an auditor or officer who sees the machine leave the register finds the matching GST entry already explained.
