GST on Sale of Old Machinery: Rates and Rules

Businesses often sell old machinery when they upgrade equipment, replace outdated assets or close a business unit. However, such a sale may create GST obligations. Therefore, the seller must carefully review the machinery’s HSN classification, applicable GST rate, input tax credit claimed and manner of disposal.

This article explains the GST rules for selling old machinery in simple language.

Does GST Apply to the Sale of Old Machinery?

Yes, GST may apply when a registered business sells machinery used for business purposes.

Under Section 7 of the CGST Act, 2017, the sale or disposal of a business asset may qualify as a supply. Consequently, a business should examine GST before selling:

• Factory machinery;
• Plant and equipment;
• Manufacturing tools;
• Electrical equipment;
• Earth-moving machinery;
• Office equipment;
• Used business vehicles; or
• Machinery sold as scrap.

Therefore, the fact that machinery is old, fully depreciated or sold below its original cost does not automatically make the sale GST-free.

What Is the GST Rate on Used Machinery?

Generally, used machinery follows the same HSN classification and GST rate as the corresponding new machinery. However, the seller must determine the correct rate according to the machine’s description, function and technical specifications.

These rates are only indicative. Accordingly, the seller should verify the exact HSN code and current rate from the latest CBIC GST rate schedule before issuing the invoice. cbic-gst.gov.in

GST Calculation When ITC Was Claimed

Section 18(6) of the CGST Act applies when a registered person sells capital goods or plant and machinery on which the business claimed input tax credit.

In that situation, the seller generally pays the higher of:

1. GST calculated on the transaction value; or
2. The original ITC reduced by 5 percentage points for every quarter or part of a quarter from the date of the original invoice.

Thus, the calculation is:

GST payable = Higher of GST on sale value or reduced ITC amount

Example of GST Calculation Under Section 18(6)

Assume that:

• Original machinery value: ₹10,00,000;
• GST paid on purchase: ₹1,80,000;
• ITC claimed: ₹1,80,000;
• Period of use: 8 quarters;
• Sale price: ₹4,00,000; and
• Applicable GST rate: 18%.

Step 1: Calculate GST on the sale price

₹4,00,000 × 18% = ₹72,000

Step 2: Calculate the reduced ITC

Reduction:

8 quarters × 5% = 40%

Remaining ITC:

100% – 40% = 60%

Reduced ITC:

₹1,80,000 × 60% = ₹1,08,000

Step 3: Compare both amounts

Therefore, the seller must pay ₹1,08,000 because the reduced ITC amount is higher than the GST calculated on the sale price.

What Happens After Five Years?

GST rules generally consider the useful life of capital goods as five years or 60 months for this calculation.

Once the machinery completes five years of use, the reduced ITC amount may become nil. Consequently, the seller generally pays GST on the actual transaction value at the applicable rate.

Before finalising the calculation, the seller should verify:

• The date of the original purchase invoice;
• The date on which the machinery was put to use;
• The number of completed quarters;
• The original ITC claimed; and
• The applicable calculation under Section 18(6) and Rule 44.

Does Full Depreciation Remove GST Liability?

No. Full depreciation under the Income-tax Act does not automatically remove GST liability.

For example, a machine may have a zero book value but may still be sold for ₹5,00,000. In such a case, GST may still apply to the sale.

Income-tax depreciation and GST valuation operate under different laws. Therefore, the seller should not automatically treat the book value or income-tax written-down value as the GST value.

GST When the Business Did Not Claim ITC

If the business did not claim ITC on the purchase of machinery, it should preserve the original purchase invoice and supporting records.

Even then, the sale may attract GST if:

• The seller is registered under GST;
• The machinery was used for business purposes; and
• The transaction qualifies as a taxable supply.

Therefore, the seller may need to charge GST on the transaction value at the applicable rate.

Not claiming ITC does not, by itself, make the subsequent sale exempt.

GST on Fully Depreciated Machinery

A fully depreciated machine can still have a taxable sale value.

Accordingly, the seller should consider:

• Actual sale consideration;
• Applicable HSN;
• GST rate;
• ITC claimed at the time of purchase;
• Number of quarters for which the machinery was used; and
• Requirements of Section 18(6).

Thus, the seller should not treat the sale value as nil merely because the machinery is fully depreciated in the books.

Margin Scheme for Second-Hand Machinery Dealers

Rule 32(5) of the CGST Rules provides a margin-based valuation method for eligible registered persons dealing in second-hand goods.

Under this scheme:

Taxable value = Selling price – Purchase price

If the dealer sells the machinery below its purchase price, the negative margin is ignored. However, the dealer cannot use the loss to create a negative GST value.

The margin scheme may apply when:

• The person deals in buying and selling second-hand goods;
• The person sells the goods as such or after minor processing;
• The processing does not change the nature of the goods; and
• The person does not claim ITC on the purchase of those goods.

The Government has clarified that eligible registered dealers dealing in second-hand goods may use the margin scheme, subject to Rule 32(5). www.pib.gov.in

Example of the Margin Scheme

Suppose a second-hand machinery dealer:

• Purchases a used machine for ₹3,00,000;
• Sells it for ₹3,50,000; and
• Does not claim ITC on the purchase.

The taxable margin will be:

₹3,50,000 – ₹3,00,000 = ₹50,000

Therefore, the dealer may calculate GST on ₹50,000 instead of ₹3,50,000, provided the transaction satisfies all conditions of Rule 32(5).

Important Point for Businesses Selling Their Own Machinery

A business selling its own used machinery as a one-time disposal should not automatically apply the margin scheme.

The margin scheme mainly applies to a person who deals in buying and selling second-hand goods. In contrast, a factory, manufacturer or contractor selling its own capital machinery should examine Section 18(6) and the normal valuation provisions.

Moreover, the income-tax written-down value should not automatically replace the purchase price under Rule 32(5).

GST on Machinery Sold as Scrap

The GST treatment may change when a business sells machinery as scrap instead of selling it as usable equipment.

The seller should distinguish between:

• Functional used machinery;
• Machinery sold for dismantling;
• Iron and steel scrap;
• Electrical scrap;
• Used machine parts; and
• Other recyclable materials.

If the machine remains usable, the invoice should describe it as used machinery. However, if the buyer purchases it only for dismantling or recovery of materials, the seller should determine the correct scrap HSN and GST rate.

Therefore, the business should not describe usable machinery as scrap merely to apply a lower GST rate.

GST on Written-Off or Destroyed Machinery

A business may write off machinery in its books without selling it. In that situation, the GST treatment depends on what actually happened to the asset.

Section 17(5)(h) may restrict the related ITC when goods are:

• Lost;
• Stolen;
• Destroyed;
• Written off;
• Given as gifts; or
• Distributed as free samples.

Consequently, the business may need to reverse the applicable ITC if it destroys, abandons or writes off machinery without making a taxable sale.

The business should maintain:

• Management or board approval;
• Disposal or destruction records;
• Photographs;
• Scrap-sale invoices;
• Insurance documents; and
• ITC reversal workings.

A simple accounting write-off does not always receive the same GST treatment as a physical disposal.

GST Invoice for Sale of Old Machinery

The seller should issue a proper GST tax invoice containing:

• Seller’s name, address and GSTIN;
• Buyer’s name, address and GSTIN, where applicable;
• Invoice number and date;
• Description of machinery;
• Brand, model and serial number;
• Quantity;
• Sale value;
• Correct HSN code;
• Applicable GST rate;
• CGST and SGST or IGST;
• Total invoice value;
• Place of supply; and
• Transport details, where applicable.

In addition, the seller should clearly state whether it is selling:

• Used machinery;
• Machinery for dismantling; or
• Scrap.

Intra-State and Inter-State Sale

For an intra-State sale, the seller generally charges CGST and SGST or UTGST.

On the other hand, for an inter-State sale, the seller generally charges IGST.

Before issuing the invoice, the seller should verify:

• Buyer’s location;
• Delivery location;
• Place of supply; and
• E-way bill requirements.

Reporting the Sale in GST Returns

The seller should follow these steps:

1. Issue the correct GST invoice.
2. Identify the correct HSN and GST rate.
3. Calculate the Section 18(6) liability, where applicable.
4. Report the outward supply in GSTR-1.
5. Include the output tax in GSTR-3B.
6. Reconcile the return with the books.
7. Preserve the invoice, payment proof and calculation workings.

A sale to a registered buyer will generally be reported as a B2B transaction. Similarly, a sale to an unregistered buyer will generally be reported under the relevant B2C category.

Compliance Checklist

Before selling old machinery, the business should check:

• Original purchase invoice;
• Date of purchase;
• Date of installation or use;
• ITC originally claimed;
• Number of completed quarters;
• Book value and tax depreciation;
• Proposed sale price;
• Applicable HSN;
• Applicable GST rate;
• Section 18(6) calculation;
• Buyer’s GSTIN;
• Place of supply;
• E-way bill requirement;
• Sale agreement or quotation; and
• GST return reporting.

Common Mistakes to Avoid

Businesses should avoid the following mistakes:

1. Assuming that old machinery is automatically exempt from GST.
2. Charging 18% without verifying the correct HSN.
3. Ignoring Section 18(6) after claiming ITC.
4. Treating book value as the GST value.
5. Applying the margin scheme to a one-time disposal.
6. Treating income-tax WDV as the purchase price without checking Rule 32(5).
7. Describing usable machinery as scrap.
8. Failing to issue a proper tax invoice.
9. Not reporting the sale in GSTR-1 and GSTR-3B.
10. Failing to reverse ITC when machinery is destroyed or written off.
11. Ignoring e-way bill requirements.
12. Not preserving purchase invoices and ITC records.

Important Official References

• CBIC GST Goods and Services Rates
• CGST Act, 2017 — India Code
• CBIC GST Acts and Rules
• GST Council Margin Scheme Flyer
• CBIC Clarification on Second-Hand Goods
• GST Portal

GST rates and procedures may change through notifications, circulars and amendments. Therefore, businesses should verify the latest position before issuing the invoice or filing the return.

Conclusion

GST on the sale of old machinery depends on the machinery’s HSN classification, applicable GST rate, ITC claimed and manner of disposal.

When a business sells capital machinery on which it claimed ITC, it should calculate the liability under Section 18(6). It must then pay the higher of the GST on the transaction value or the reduced ITC amount.

Similarly, a second-hand machinery dealer may use the Rule 32(5) margin scheme only after satisfying the prescribed conditions. At the same time, every business should distinguish between the sale of usable machinery, the sale of scrap and the writing off or destruction of an asset.

Businesses in Greater Noida and across India should maintain complete purchase, ITC, sale and calculation records. As a result, they can report the transaction accurately in GSTR-1 and GSTR-3B and reduce the risk of GST notices.

FAQs

1. Is GST applicable on the sale of old machinery?

Yes. GST may apply when a registered business sells machinery used for business purposes.

2. What is the GST rate on used machinery?

There is no single rate. The rate depends on the correct HSN classification and applicable GST notification.

3. Is GST payable if the machinery is fully depreciated?

Yes. Full depreciation under the Income-tax Act does not automatically remove GST liability.

4. What is Section 18(6) of the CGST Act?

Section 18(6) prescribes the calculation applicable when a business sells capital goods or plant and machinery on which it claimed ITC.

5. How does the seller calculate GST under Section 18(6)?

The seller generally pays the higher of GST on the transaction value or the ITC amount reduced by 5 percentage points for every quarter or part of a quarter.

6. Can every business use the margin scheme?

No. The margin scheme generally applies to eligible registered persons dealing in buying and selling second-hand goods. A business selling its own used machinery should not apply it automatically.

7. Is GST applicable when machinery is sold as scrap?

Yes, GST may apply. The seller should determine the correct HSN and rate based on the actual nature of the scrap.

8. Does book value decide the GST value?

No. The book value or income-tax WDV does not automatically determine the GST value.

9. Should the sale be reported in GSTR-1?

Yes. The seller should generally report the sale in GSTR-1 and include the tax liability in GSTR-3B.

10. What happens if machinery is destroyed or written off?

Section 17(5)(h) may restrict or require reversal of the related ITC when goods are lost, stolen, destroyed, written off or disposed of without consideration.