Normally as per Section 15 of the CGST Act, 2017, GST is charged on the transaction value of the supply of goods or services or both. However, in respect of second hand goods, a person dealing is such goods may be allowed to pay tax on the margin i.e. the difference between the value at which the goods are supplied and the price at which the goods are purchased. If there is no margin, no GST is charged for such supply. Such charging of GST on the margin of second hand goods is referred to as margin scheme under GST.
The purpose of the margin scheme is to avoid double taxation as the goods, having once borne the incidence of tax, re-enter the supply and the economic supply chain.
Margin Scheme under GST:
Margin Scheme under GST law is contained under Rule 32(5) of the CGST Rules, 2017 which mandates that where a taxable supply is provided by a person dealing in buying and selling of:
- 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.
It may be noted here that in case any cost has been incurred on minor processing which does not change the nature of the goods , such cost will not be considered while arriving at margin , as it is difference between selling price and purchase price only. The purchase price will not include the cost of minor processing.
Further in case any other value is charged by the second hand goods dealer by way of repair, refurbishing, reconditioning etc., the same shall also be added to the value of goods (selling price) and thus be part of the margin.
Meaning of Second hand goods
No specific definition of second hand goods is there in GST law. However in general parlance they would mean used goods.
Section 2(52) of the CGST Act,2017 states that “goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”.
Hence second hand goods, since not specifically excluded in the definition, are included in the definition of goods and the GST law shall apply to second hand goods in the same manner as it applies to new goods except the fact that margin scheme will be applicable for second hand goods.
Also Read: All about GST on sale of old and used motor vehicles
Purchase value of goods repossessed from a unregistered defaulting borrower
In the preceding para we had discussed that under margin scheme the GST is applicable on difference between sale and purchase price. Now question arises as what will be the purchase price in case of goods which were repossessed by Banks / FI etc from unregistered defaulting borrower.
In this regard proviso to Rule 32(5) mandates that the purchase value of goods repossessed from a unregistered defaulting borrower, 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 (5%) for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession.
Inward supply of second hand goods exempt
Normally the second hand goods dealer purchases goods from individual / households who are not registered under GST law. the question here arises as to whether GST will apply on such supplies or not.
In this regard, Notification No.10/2017-Central Tax (Rate) dated 28-6-2017 exempts intra-State supplies of second hand goods received by a registered person, dealing in buying and selling of second hand goods and who pays the central tax on the value of outward supply of such second hand goods as determined under sub-rule (5) of rule 32 of the CGST Rules, 2017, from any unregistered supplier, from the whole of the central tax levied under the CGST Act, 2017. Similar exemptions are also there in respective SGST Acts.
In other words any supply to a registered second hand goods dealer by a unregistered person (individual / household etc) has been exempted from GST.
Margin Scheme is optional
It is important to note here that as per Rule 32 (5) of the CGST Rules, 2017, determination of value as per margin scheme is optional. Thus the scheme is not mandatory. A dealer can also choose to pay GST on full value of supply and at same time avail input tax credit (ITC) on the GST paid by him on purchase of such goods from registered suppliers (purchase from unregistered person is exempted).
Conditions for eligibility of Margin Scheme
a) The supply should be of second hand goods only.
b) Pre-owned goods are not necessarily deemed to be second hand goods or used goods. The goods should actually be used before.
c) The person should be dealing in both buying and selling of second hand goods. Solitary sales of unwanted second hand goods/assets may not be deemed to be dealing in such goods.
d) Minor processing is allowed. The dealer can carry out minor processing like repairs, refurbishing,
re-boxing, etc.
d) Nature of goods should not change. If different accessories and goods are bought and assembled into a new kind of product, which is different in nature as compared to the goods bought earlier, margin scheme not apply.
e) No input tax credit should have been availed on purchases of second hand goods. As discussed purchases from unregistered persons have been exempted thus question of ITC will not arise. However if purchase is made from registered supplier, no ITC should be availed for tax paid.
f) Losses cannot be set-off. Where the selling price is lower than the purchase price, tax on losses
shall be NIL and such negative margin cannot be set-off for tax payable on other positive margins g) If margin scheme is opted for a transaction of second hand goods, the person selling the car to the company shall not issue any taxable invoice and the company purchasing the car shall not claim any ITC.
GST Rates on Second Hand Goods
Since there is no distinction between new goods and second hand goods under GST Law, the GST rates as given under Notification No.1/2017-Central Tax (Rate), dated 28-6-2017, as amended from time to time will also be applicable on the second hand goods and thus in case of margin scheme such rates will be applied on the margin amount to arrive at the GST payable by the second hand goods dealer.
However exception to this is in regard to old and used vehicles wherein separate rates have been provided under Notification no 8/2018 – CT rate dated 25-01-2018,
Illustrations:
Illustration 1: (Purchase of Car from unregistered supplier)
A company say M/s X Ltd, which deals in buying and selling of second hand cars, purchases a second hand Maruti Celerio Car of March, 2017 make (Original price Rs. 5 lakhs) for Rs. 3 lakhs from an unregistered person and sells the same after minor furbishing in July, 2020 for Rs. 3,50,000/-.
The supply of the car to the company for Rs. 3 lakhs shall be exempted and the supply of the same by the company to its customer for Rs. 3.5 lakhs shall be taxed and GST shall be levied. The value for GST purpose shall be Rs. 50000/-, i.e. the difference between the selling and the purchase price of the company.
Illustration 2: (Purchase of Car from registered supplier)
A company say M/s X Ltd, which deals in buying and selling of second hand cars, purchases a second hand Maruti Celerio Car of March, 2014 make (Original price Rs. 5 lakhs) for Rs. 3 lakhs from an A Ltd (registered person) and sells the same after minor furbishing in July, 2020 for Rs. 3,50,000/-.
If A Ltd had availed Input Tax credit:
In this case A Ltd shall pay GST on the transaction value or shall pay the amount of reduced input tax credit involved in the remaining useful life in months to be computed on pro rata basis , taking the useful life as five years.
In this case if X Ltd avails input tax credit of such amount , he shall not be eligible for margin scheme and will have to pay GST on sale price of such car. In case he want to opt for margin scheme he need to forego such credit and the value for GST purpose shall be Rs. 50000/-, i.e. the difference between the selling and the purchase price of X Ltd.
If A Ltd had not availed Input Tax Credit
In this case as per explanation (i) of the Notification no 8/2018 – CT rate dated 25-01-2018, (applicable only for vehicles) in case the registered person viz A Ltd has claimed depreciation under sec 32 of Income tax act, 1961 on the vehicles the difference between the consideration received for supply & the depreciated value of such goods as on date of supply will be the margin. Where the margin arrives to be negative, it shall be ignored. Thus for the purpose of calculating the margin amount the depreciated value to be taken will be as per Income tax act as given in the notification.
In this case also if X Ltd avails input tax credit of any GST amount paid to A Ltd , he shall not be eligible for margin scheme and will have to pay GST on sale price of such car. In case he want to opt for margin scheme he need to forego such credit and the value for GST purpose shall be Rs. 50000/-, i.e. the difference between the selling and the purchase price of X Ltd.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
