GST Margin Scheme on second hand goods

The second hand goods industry has been substantially growing since past few decades in India and across the globe. There is a huge organized as well as unorganized market for second hand goods in India for re-sale of vehicles, electronic products, mobile phones, televisions, laptops, watches, jewellery, clothes, hand bags, sneakers, and the list is endless. Hence, it becomes important to study how the Indirect taxes i.e. GST affects the businesses engaged in trading of such second hand goods.

The margin scheme is applicable for a dealer  dealing in second-hand  motor vehicles only, not allowed to take input tax credit who adopt this scheme.

Margin Scheme for valuation of capital goods 

The scheme is made applicable to all taxpayers on the sale of the motor vehicle held as a capital asset. Vide Notification No. 8/2018 - Central Tax (Rate) dated 25 Jan 2018. In this regard, GST has to be paid on the excess of selling price over the written down value as per the Income Tax Act, 1961, where depreciation has been claimed by the taxpayer. Where no depreciation has been claimed, GST shall be paid on the difference in the selling price and the purchase price.

Margin Scheme

Margin scheme under GST helps avoid double taxation on the supply of goods which has been taxed already. Under Margin scheme, GST the supplier or the seller of the goods can calculate on the difference between the value of the supplied by the seller and the purchase value of the goods received by the customer.

Normally, as per valuation rules, GST is charged on the actual transaction value of supply of the goods, however, in respect of the second hand goods, a person dealing in such goods, may be allowed to pay tax on the margin. If there is no margin, then, no GST would be payable on such transaction. This is the basis of the GST margin scheme.

Valuation of Supply under the Margin Scheme

As per provisions of rule 32(5) of the CGST Rules, 2017, 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.

The proviso to the aforesaid rule further provides that in case of 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 for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession.

Example for Margin Scheme

For example, XYZ, a car selling company, which deals in buying and selling of second hand cars, purchases a second hand car at Rs.5,00,000 from an unregistered person and sells the same after minor furbishing at Rs.5,75,000, exemption of GST shall for the purchased value of the vehicle. However, when XYZ, a registered user sold the same vehicle to a customer at the price value of Rs.5,75,000, GST shall apply to the difference amount i.e, Rs.75,000. Hence, GST applies only to the margin amount.

In case if the seller adds other value to the total amount by way of repair, refurbishing, reconditioning or other services, the seller shall add the expenses to the value of goods and should apply as part of the margin. If the unregistered user opts for the margin scheme for a transaction of second hand goods, then the person selling the car to the company would not issue any taxable invoice and the company purchasing the car cannot claim any input tax credit.

What is Margin Scheme under GST Law? 

As per the Margin Scheme under GST Law, a second hand goods dealer can sell used goods paying GST only on the margin value of such goods, instead of the transaction value or the sale value [Rule 32 (5) of the CGST Rules ] 

What is the purpose of having a Margin Scheme in GST? 

The purpose of the scheme is to avoid double taxation as these are second hand / used goods, having earlier borne the final tax incidence, and re-entering the economic supply chain.

Is the term “Margin Scheme” defined under the GST Law?

No. There is no specific definition of “Margin Scheme”. However, the valuation of second hand goods is specifically dealt with under Rule 32 (5) of the GST Rules which is commonly referred to as the Margin Scheme.

Are “second hand goods” defined under the GST Law?

No. Second hand goods have not been defined under the GST Law. 

As per Collins dictionary, Second hand things are not new and have been owned by some one else. 

As per Oxford dictionary, Second hand goods are those having had a previous owner and are not new.

Who can take the benefit of Margin Scheme? 

As per Rule 32(5), any person dealing in buying and selling of second hand goods can avail the benefit of Margin Scheme. 

Is it mandatory to follow Margin Scheme for a supplier dealing in second hand goods? 

No. It is not mandatory to follow margin scheme for a supplier dealing in second hand goods.

Can a normal supplier, not dealing in second hand goods, sell its used traded goods under the Margin Scheme? 

No. The benefit of Margin Scheme can be availed by the supplier only if there is a regular dealing in buying and selling of second hand goods.

Can a normal supplier, not dealing in second hand goods, sell its old capital assets / fixed assets under the Margin Scheme? 

No. The benefit of Margin Scheme cannot be availed for sale of old capital assets / fixed assets. But only in the case of motor vehicles, that too only if input tax credit has not been claimed.

What is the value of supply of second hand goods as per Rule 32(5)? 

The value of supply shall be the difference between the selling price and the purchase price.

Is the value of supply different in case of goods sold at a loss? 

Yes. whenever the difference between the selling price and the purchase price is negative, the value of such supply shall be considered as Nil.

Can a supplier set-off the loss on selling some second hand goods against the profit on selling other second hand goods while paying GST? 

No. As per Rule 32(5), where the second hand goods are being sold at a loss resulting in negative margin, the value of such supply shall be Nil. Hence, the loss cannot be set off against the profits.

What are the basic conditions to avail the benefit of Margin Scheme?

1. The supplier must to be dealing in buying and selling of second hand goods 

2. The goods being bought / sold must be used earlier 

3. The goods being sold must be pre-owned by some one else other than the supplier 

4. There should be no major processing on such goods, which changes the nature of goods. 

5. The supplier must not have availed the Input Tax Credit on the purchase of such second hand goods.

Does a supplier dealing in second hand goods need to pay GST on purchase of goods from an unregistered person? 

No. Such purchases from unregistered persons are specifically exempted from GST as per notification [Notification No. 10/2017-Central Tax (Rate) dated 28.06.2017 ]

Does a supplier, dealing in second hand goods, need to pay GST on purchase of goods from an registered person? 

Yes. There is no exemption for purchase of second hand goods from a registered person and hence the supplier has to pay GST as per the tax invoice received from the registered person.

In above case, can the supplier avail Input Tax Credit for the GST paid on purchase of second hand goods from registered dealer? 

No. As per Rule 32(5), a supplier can follow margin scheme only if he has not availed Input Tax Credit on the purchase of such second hand goods. [ GST AAR Karnataka inAdvance Ruling No. KAR ADRG 15/2020 Re: Attica Gold Pvt. Ltd. ]

Can unboxed goods be considered as second hand goods? 

No. Mere unboxing of goods does not make the goods second hand or used. Hence, selling of unboxed goods and selling without usage cannot be considered for availing margin scheme.

Can refurbished goods be considered as second hand goods? 

Yes. Selling of refurbished goods can be considered as second hand goods and margin scheme can be applied to such goods. However, only minor refurbishment is allowed. In case of any major refurbishing where the nature of goods change, does not qualify for the margin scheme benefit.

Can a supplier dealing in second hand goods availing the benefit of Margin scheme, sell its old capital assets / fixed assets under the Margin Scheme?

No. The benefit of Margin Scheme cannot be availed for sale of old capital assets / fixed assets even by a second hand goods dealer. 

Is a supplier following margin scheme required to issue a tax invoice for supply of second hand goods? 

No. If margin scheme is opted for selling second hand goods, the person supplying the goods shall not issue any taxable invoice and the person purchasing such goods cannot claim any ITC on these goods.

How are the value additions to the second hand goods to be treated under margin scheme? 

In case any value is added to the second hand goods by way of repair, refurbishing, reconditioning etc. over and above the sale value, the same shall be added to the value of goods and be part of taxable margin.

Can margin scheme be availed in case of inter-state supply of second hand goods? 

Yes. The margin valuation scheme can be availed for both, intra-state as well as inter-state supplies. [ GST AAR Rajasthan in Advance Ruling No. RAJ/AAR /2018-19 / 35 Re: Shambhu Traders Pvt. Ltd. ] 

Can a supplier availing Margin scheme, take Input Tax Credit on expenses (other than purchases of second hand goods) ? 

Yes. Rule 32(5) restricts Input Tax Credit availment only on the purchase of second hand goods, which are further sold under margin scheme. Hence, Input tax credit can be availed on all business expenses like rent, advertisement, commission, professional expenses, etc. (other than purchases of second hand goods) subject to the basic conditions of Input Tax Credit availment specified in Section 16 to 21 and Rules 36 to 45. [ GST AAR Karnataka in Advance Ruling No. KAR ADRG 40/2022 Re: Attica Gold Pvt. Ltd. ]

Where should the supplies of second hand goods appear in the monthly return GSTR 3B? 

The goods being sold under Margin Scheme are neither zero rated supplies nor Nil rated or exempted supplies. Hence, the total supplies of second hand goods should be mentioned against “Outward taxable supplies” in table 3.1 wherein the total taxable value shall be the taxable margin value of second hand goods.

How to show the supplies of second hand goods in the monthly return GSTR 1? 

The total supplies of second hand goods should be mentioned against “Outward taxable supplies” in table 4, 5 and 7, as applicable, wherein the taxable value shall be the taxable margin value of second hand goods on which taxes are being paid.

Is it mandatory to generate e-way bill, where second hand goods are being supplied and the gross value exceed the minimum threshold limit for e-way bill?

Yes. E-way bill rules shall apply to all the supplies of second hand goods in the same manner as they apply to normal goods. Even if the taxable value of such goods are below the threshold limit for e-way bill but the gross value exceeds the same, it is mandatory to generate an e-way bill for such transfers. 

Is it mandatory to follow e-invoicing rules for second hand goods? 

Yes. It is mandatory to follow e-invoice rules even for second hand goods, where the aggregate annual turnover (gross) exceeds the specified turnover limit for e-invoice (At present, the threshold is INR 10 Crores)