Disposal of business assets without consideration, such as donation, scrapping, write-off or transfer to another person, can have GST consequences even if no sale price is received. Businesses often overlook these transactions because no invoice is generated.
When Disposal Is Taxable
Schedule I Clause 1: Permanent Transfer of Business Assets
Schedule I of the CGST Act treats the permanent transfer or disposal of business assets as supply even without consideration, provided input tax credit has been availed on those assets.
This means:
- If a business purchased machinery and claimed ITC, and later donates the machinery to a charity, the donation is a taxable supply.
- If ITC was not claimed, Schedule I may not apply, but Schedule II may still apply to goods transferred.
Schedule II Clause 4: Transfer of Business Assets
Schedule II provides that where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so that they no longer form part of those assets, whether or not for consideration, such transfer or disposal is a supply of goods.
This clause operates independently of ITC and brings the disposal of business goods within GST.
Private Use of Business Goods
Schedule II also treats putting business goods to private use, or making them available to any person for non-business purposes, whether or not for consideration, as a supply of services.
Input Tax Credit Reversal
Section 17(5)(h) blocks input tax credit on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
If a business asset is written off or destroyed, any credit already claimed may need to be reversed. This is separate from the liability under Schedule I. Businesses must coordinate reversal and output tax to avoid double taxation but also ensure full compliance.
Valuation
For disposal without consideration, value is determined under Rule 28:
- Open market value of the asset.
- If not available, value of supply of goods or services of like kind and quality.
- If that is also not available, 110% of the cost of production or acquisition, adjusted for depreciation as per commercial practice.
- Residual method of reasonable cost plus margin.
For used capital goods, open market value or depreciated book value plus a mark-up may be acceptable, but the method must be documented.
Invoicing and Reporting
- If the disposal is taxable, issue a tax invoice or bill of supply? For a deemed supply of goods, a tax invoice should be issued under Section 31.
- Report the supply in GSTR-1 and pay tax in GSTR-3B.
- If the recipient is not registered, tax may still be payable by the supplier.
- Maintain disposal records, valuation worksheets, fixed asset registers and ITC reversal calculations.
Practical Example
A company claims ITC on a laptop purchased for Rs 1,20,000 plus GST. After two years, it donates the laptop to an NGO. Under Schedule I, the donation is a taxable supply because ITC was claimed. The open market value of the used laptop is Rs 60,000. GST at 18% is Rs 10,800. The company issues a tax invoice and pays output tax. It must also check whether any additional ITC reversal is required.
Distinction from Loss or Theft
If an asset is destroyed by fire, lost or stolen, there is no supply because there is no transfer or disposal. However, ITC on such goods is blocked under Section 17(5)(h). The business must reverse credit but does not pay output tax on the asset.
How Anuj Desai & Associates Can Help
We help businesses track asset disposals, determine whether GST is payable, calculate valuation, manage ITC reversals and maintain audit documentation.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
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