Calculate the statutory comparison before closing the disposal
For a taxable sale of machinery on which input tax credit was taken, section 18(6) of the CGST Act requires payment of the higher of the prescribed reduced-credit amount and tax on the section 15 transaction value. An accounting loss on disposal does not eliminate this comparison. Nor should the seller simply add both amounts together. The original invoice, ITC actually taken, disposal date, valuation and applicable sale rate are essential inputs.
Read both rules rather than hiding their different time units
The CGST Rules reproduced in the state-tax-hosted ICAI bare-law compilation contains two relevant provisions. Rule 40(2) reduces input tax by five percentage points for every quarter or part thereof from the invoice date. Rule 44(6) refers to the remaining-useful-life calculation in rule 44(1)(b), using five years and remaining months; its illustration ignores a part of a remaining month. Rule 44(6) requires separate tax-head calculations and addresses disclosure in GSTR-1 where that amount exceeds transaction-value tax.
These texts can produce different figures for a part-quarter interval. Do not silently claim that they are mathematically identical or that a taxpayer has a free option to choose the lower result. CBIC Circular 231/25/2024-GST dated 10 September 2024 expressly refers to section 18(6) read with rule 44(6) in its demo-vehicle context. That circular is not a blanket machinery-disposal ruling resolving every interaction with rule 40(2). For a material difference, retain both calculations and a reasoned applicable treatment before reporting. This article provides a computation and reconciliation method, not an invented universal tie-breaker. Sources were checked on 22 October 2026.
Build the disposal worksheet
Use one row per asset and retain the original tax invoice date, ITC actually availed by tax head, evidence of use, sale invoice date, section 15 value, rate classification, quarter count and remaining-month count. For the quarter method, calculate original relevant credit × max(0, 1 − 0.05 × quarters or parts). For the month method, calculate credit × remaining whole months / 60. Determine the original residual-credit components separately by tax head, make the section 18(6) comparison with transaction-value tax, and reconcile the resulting liability to the invoice and returns. The examples with separate CGST and SGST comparisons assume matching original and sale tax heads. Where the original credit and disposal tax heads differ, do not mechanically add unmatched head-wise maxima; separately analyse the statutory amount and its proper reporting and payment allocation.
The rates in the cases below are expressly assumed for illustration; they do not classify all machinery at 18%. Confirm the tariff description, notifications, place of supply and whether the price is tax-inclusive. Valuation rules may displace the stated price where parties are related or price is not the sole consideration. A book written-down value is neither automatically the section 15 value nor a substitute for original ITC.
Keep special situations outside the ordinary machine-sale formula
The section 18(6) proviso allows transaction-value tax for refractory bricks, moulds and dies, jigs and fixtures supplied as scrap. Do not extend that named exception to every machine merely described as scrap. If no ITC was taken, section 18(6)’s specific ITC-taken condition needs checking; ordinary supply, valuation and rate rules may still impose GST. Used-vehicle margin notifications, destroyed/written-off goods, gifts, branch transfers and business transfers require separate analysis.
Reconcile GST with fixed-asset accounting without forcing identical bases. The asset register may show historical cost and accounting depreciation, while this tax comparison follows original credit and statutory time measures. Retain invoice tax and any additional statutory liability distinctly so that the accounting entry and return do not duplicate the same tax.
Worked illustrations
The following cases use fictional figures and stated assumptions. Amounts are Indian rupees unless a different unit is expressly shown. They illustrate preparation controls and do not represent real client results.
Illustrative example 1: both methods agree after one year
Assume relevant ITC ₹1,80,000 and exactly twelve months/four completed quarters from invoice to disposal, with 48 whole months remaining. Quarter residual: ₹1,80,000 × 80% = ₹1,44,000. Month residual: ₹1,80,000 × 48/60 = ₹1,44,000. Sale value ₹5,00,000 at assumed 18% gives ₹90,000. The comparison produces ₹1,44,000, an excess of ₹54,000 over transaction tax, not ₹2,34,000 in aggregate.
Illustrative example 2: transaction tax is higher
Assume ITC ₹1,80,000, exactly 36 months/twelve quarters elapsed and 24 months remaining. Both residual workings give ₹72,000. Sale value ₹6,00,000 at assumed 18% gives ₹1,08,000. The higher amount is ₹1,08,000; a separate additional ₹72,000 would double count the comparison.
Illustrative example 3: the asset is beyond five years
Assume ITC ₹90,000, exactly five years elapsed and no remaining useful life for this statutory calculation. Both residual methods give zero. A taxable sale for ₹1,00,000 at assumed 18% still gives ₹18,000. Exhaustion of the residual-credit period does not itself make the sale exempt.
Illustrative example 4: a part-quarter exposes the difference
Assume original credit ₹1,80,000, use for four years, six months and fifteen days, and five whole months of remaining life, as in rule 44’s time pattern. Rule 40’s nineteen quarters or parts leave 5%, or ₹9,000. Rule 44 gives ₹1,80,000 × 5/60 = ₹15,000. At assumed transaction tax ₹10,800, the respective comparisons give ₹10,800 and ₹15,000. The ₹4,200 difference must be analysed and documented; the worksheet alone does not confer a choice.
Illustrative example 5: a tax-inclusive sale price
Assume an agreed machinery sale price of ₹1,18,000 inclusive of 18% tax, a valid ordinary transaction value and a supported residual amount ₹25,000 under the applicable calculation. Taxable value is ₹1,18,000/1.18 = ₹1,00,000 and invoice tax ₹18,000. The comparison is ₹25,000, leaving ₹7,000 above invoice tax to reconcile under the applicable reporting treatment.
Illustrative example 6: calculate central and state credit separately
Assume eligible ITC originally taken was CGST ₹45,000 and SGST ₹45,000. Exactly 24 months/eight quarters have elapsed, leaving 36 months. Residual credit is ₹27,000 under each head. An intra-State sale for ₹2,00,000 at assumed 9% CGST plus 9% SGST gives ₹18,000 under each head. The comparison gives ₹27,000 each, total ₹54,000, including an excess ₹18,000 across the two heads.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Confirm it is a supply and identify the asset. | Disposal approval and asset identity. |
| 2 | Verify whether and how much ITC was actually taken. | Invoice and original credit ledger trail. |
| 3 | Establish original invoice and disposal dates. | Dated source documents. |
| 4 | Check classification and current sale rate. | Applicable tariff and notification. |
| 5 | Determine value under section 15 and valuation rules. | Sale terms, relationship and consideration review. |
| 6 | Compute quarter-or-part residual credit. | Rule 40(2) schedule. |
| 7 | Compute remaining-month credit separately by head. | Rule 44(6) schedule. |
| 8 | Resolve any material difference on recorded legal grounds. | Comparison and documented treatment. |
| 9 | Compare the supported amount with transaction tax. | Higher-of calculation without double counting. |
| 10 | Reconcile invoice, GSTR-1, GSTR-3B and asset entries. | Reporting trail and payment reconciliation. |
Sixteen practitioner FAQs
1. Does a sale below book value avoid GST?
No. Book profit or loss does not decide section 18(6), supply valuation or the sale rate.
2. Must residual credit and sale tax both be added?
The statutory test compares the two amounts and takes the higher; avoid counting the same liability twice.
3. Is book depreciation used in the residual-credit formula?
No. The statutory credit-reduction calculation is distinct from accounting or income-tax depreciation.
4. Why show both quarter and month methods?
The rules use different time units and can differ for partial intervals. Concealing that difference can understate the compliance issue.
5. May the seller automatically choose the lower method?
No such general option is established here. Record the applicable legal treatment where the results differ.
6. Does Circular 231 settle every machinery case?
No. It concerns demo-vehicle ITC and expressly refers to rule 44(6) on sale; apply its scope accurately.
7. Is all used machinery taxed at 18%?
No. Eighteen per cent is only an assumed rate in these cases. Verify the actual classification and notification.
8. What if the price includes tax?
Extract the tax using the applicable inclusive-price fraction before making the comparison.
9. Does zero residual ITC mean an exempt sale?
No. A taxable transaction can still bear tax on its value after the statutory useful-life period ends.
10. What if no ITC was ever taken?
Examine the section 18(6) condition separately; ordinary supply and rate rules can still apply.
11. Is every scrap sale covered by the proviso?
No. The proviso identifies particular items. Do not treat an ordinary scrapped machine as automatically within it.
12. Should CGST and SGST be combined first?
Rule 44 requires separate tax-head determination; retain both components and reconcile their sum.
13. Is a related-party price automatically acceptable?
No. Apply section 15 and the relevant valuation rules where their conditions require a different value.
14. Can the asset register replace the purchase invoice?
It assists identification but does not by itself prove original tax, credit taken or the invoice date.
15. Are destroyed assets the same as taxable disposals?
No. Destruction and write-offs can involve different ITC provisions and facts.
16. Which return requires an explicit rule 44 check?
Its proviso refers to GSTR-1 when the determined amount exceeds transaction-value tax; reconcile the corresponding liability and current return implementation before filing.
Organising the supporting working
Keep the underlying records, calculation and conclusion linked to the same entity and period. When organising work with assureTax and the assureOffice tools, retain these supporting schedules alongside the final output and use only the features confirmed for the version available to you.
Conclusion
A defensible disposal file contains the original credit, the sale-tax calculation and the relevant residual-credit working. Where the two rules produce different results, resolve and record the treatment before reconciling the invoice and returns.