GST on second hand Goods- Margin Scheme
After the introduction of GST, one of the most complicated issues before the authorities was “Tax implication on sale of used or second-hand goods”. The Government took note of the issue timely and brought necessary changes in GST laws by simplifying the provisions related to second-hand goods. The Government introduced “Margin Scheme” under GST for those taxpayers who are dealing in second hand or used goods.
We all are aware that GST is chargeable on the “Transaction Value” of the goods as per the GST laws. But, in the case of second-hand goods, the dealer can opt for the “Margin Scheme” and pay tax on the margin amount only. If the margin is negative, no tax is payable. In this article, we will discuss the concept of the “Margin Scheme”.
Margin Scheme under GST
What is Margin Scheme?
- Margin Scheme has been introduced by Notification No. 10/2017- Central tax dated 28-06-2017 by making amendments in CGST Rules, 2017.
- Margin Scheme is applicable for those GST registered taxpayers who deal in the purchase and sale of second-hand or used goods and makes the purchase of such goods from unregistered persons.
- Under this scheme, if the dealer opts, he is required to pay GST only on the margin i.e. the difference between the sale price and the purchase price of the second-hand goods. However, if there is either no margin or there is a loss, no GST is payable.
- When the second-hand goods dealer purchases goods from an unregistered person, no GST is levied at that point. GST shall be chargeable only when such dealer resells the goods either as such or after minor refurbishing/ repairs. GST will not be payable on the entire transaction value rather on the margin earned by the dealer. We will take an example to understand the scheme below.
- Margin Scheme is applicable only when there is no change or minor processing (repairing/ refurbishing) of the goods. If such processing changes the nature of goods, the dealer cannot opt for the ‘Margin Scheme’. For example, a jeweller purchases a gold bracelet from an unregistered person and converts it into a gold chain before the sale, the jeweller cannot opt for ‘Margin Scheme’.
- Cost of repair, refurbishing, reconditioning etc. incurred by the dealer shall also be considered for calculating margin.
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Example: Cars24 deals in buying and selling second-hand cars. It purchases a second-hand car (original price Rs. 4 Lakhs) for Rs. 2,50,000 from Mr Ramesh (unregistered person) and sells it again to Mr Suresh after minor repairs for Rs. 3,00,000. Suppose, repairing cost is Rs. 10,000.
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Valuation of Second-hand goods under Margin Scheme
Rule 32(5) of CGST Rules, 2017
Sub-rule (5) of Rule 32 to CGST Rules, 2017 has been inserted by Notification No. 10/2017- Central Tax. This sub-rule deals with the valuation of second-hand goods including second-hand vehicles. We will first refer to Rule 32(5) before analysing its implication:
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“32 (5) Where a taxable supply is provided by a person dealing in buying and selling second-hand goods i.e. used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored.” |
Analysis of Rule 32(5):
From the reading of the above sub-rule, the following important points emerge:
- Valuation Rules under Rule 32(5) is applicable only upon the person dealing in buying and selling second-hand goods.
- Applicable in case of a supply of taxable goods by such dealer. It means that the above sub-rule has no implication in the case of a supply of exempted goods.
- The pre-requisite of this sub-rule is that the dealer shall not avail input tax credit on the purchase of second-hand or used goods.
- The dealer shall supply second-hand goods as such or after minor processing which does not change the nature of goods (already discussed above)
- Value of Second-hand goods = Selling Price – [Purchase price + Minor repairing cost]
Value of purchase in case of Repossession from Defaulting Borrower
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Proviso to Rule 32(5): “Provided that the purchase value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession”. |
Analysis of Proviso to Rule 32(5):
If any goods are sold on an EMI basis and the goods are repossessed from the defaulting borrower (unregistered) on non-payment of EMIs, the Purchase Price of second-hand goods dealer for calculating margin for the purpose of GST shall be calculated on the basis of the formula prescribed in this proviso. According to this proviso:
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Purchase price of second-hand goods = Original Purchase Price of defaulting borrower- 5% depreciation for each quarter or part thereof |
Take an example:
X dealing in electronic items sold an electronic item to Mr Y for Rs. 10 Lakhs on 01-01-2020. The electronic item is purchased by Mr Y on an instalment basis. Mr Y defaulted in payment of EMIs on 04-09-2020 and such item was taken back by the company on 21-10-2020. The electronic item was again sold by X on 11-01-2021 at Rs. 8,10,000. Calculate GST payable by X on re-sale of such item if the GST rate is supposed 28%.
Solution:
- Date of purchase by Mr. Y: 01-01-2020
- Date of Disposal by X after repossession: 11-01-2021
- Quarters or part thereof between 01-01-2020 & 11-01-2021 = 4 quarters & 11 days to be taken as 5 quarters
- Purchase Price of repossessed goods by X = Rs. 10 lakhs – (5% * 5 quarters) i.e. Rs. 7,50,000
- Margin on sale of second-hand item = 60,000 (Rs. 8,10,000- Rs. 7,50,000)
- GST Payable by X on resale of item = Rs. 60,000 * 28% = Rs. 16,800.
GST Rates on supply of second-hand vehicles
Notification No. 08/2018- CT dated 25-01-2018 specifies the GST rates for the sale of second-hand vehicles:
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Description of Goods |
GST Rate as applicable |
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Old and used LPG or CNG driven motor vehicles with engine capacity of 1200 CC or more and Length of 4000 mm or more |
18% |
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Old and used Diesel driven motor vehicles with engine capacity of 1500 cc or more and Length of 4000 mm or more |
18% |
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Old and used Sports Utility Vehicle (SUVs) with engine capacity of 1500 cc or more |
18% |
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All old and used vehicles other than the above three categories |
12% |
It has been further clarified by the aforesaid notification that:
- In case a motor vehicle is sold by a registered person who has claimed depreciation u/s 32 of the Income Tax Act:
The margin for the purpose of GST computation shall be = Selling price of Motor Vehicle- Depreciated value of the motor vehicle on the date of sale as per Income Tax act; If the margin is negative, it shall be ignored.
- In any other case:
Margin shall be = Selling Price – Purchase Price (as discussed earlier in this article); and where such margin is negative, it shall be ignored.
GST rates on second-hand goods other than vehicles
No distinction will be made between the sale of second-hand goods and new goods under GST as regards the rates of GST. If any new article is sold at the rate of 18%, then the re-sale of such used article will also be subject to 18% tax under Margin Scheme. The only exception is in the case of motor vehicles as discussed under Notification No. 08/2018- Central Tax.
Is input tax credit available on the purchase of second-hand goods
If the dealer is opting for the ‘Margin Scheme’, he can not avail the benefit of the input tax credit on the purchase of second-hand or used goods. This is the pre-condition for the ‘Margin Scheme’ as per Rule 32(5).
Second-hand goods dealer working as an agent
If the second-hand goods dealer is not directly indulged in purchase and sale of second-hand goods but facilitating only the sale of such goods for commission, ‘Margin Scheme’ shall not apply to him. In this case, he shall be liable to pay GST at the rate of 18% on the commission earned by him on crossing the turnover threshold (Rs. 20 Lakhs/ 10 lakhs) as prescribed under CGST Act, 2017.
Disclaimer: The above article is based on the opinion of the author and is meant for educational purposes only. Readers are requested to act diligently and under consultation with a professional before applying the information contained in this article.
