The introduction of India’s Goods and Services Tax (GST) on July 1, 2017, is a key milestone in the country’s indirect tax system. GST seeks to consolidate the multilayered federal and state taxes into one integrated system with greater transparency, ease of compliance, and induce a single national market. To suit different industries and businesses, the government has rolled out various GST initiatives in line with different needs and capabilities. Some of these initiatives involve easy tax schemes for small taxpayers like the Composition Scheme, exporter-friendly provisions through schemes like LUT and return procedures, and industry-specific regulations for e-commerce, real estate, and transportation. Besides, numerous measures such as QRMP (Quarterly Return Filing and Monthly Tax Payment) and specialised procedures for a few informed taxpayers ease business transactions. These steps not only alleviate the compliance burden but also foster formalisation, widen the tax base, and spur economic growth.
What is the Margin Scheme Under GST?
The GST margin scheme is a sort of tax commonly used by vendors in the trade of second-hand goods like used vehicles, antique jewelry, and various collectibles. Under the scheme, GST applies only to the profit margin represented by the difference between the selling price and the cost price rather than charging on the full selling price. This arrangement prevents double taxation on second-hand goods, as normally, the goods pay the GST on their first sale. This system works wonders for businesses engaged in pre-owned goods. Where no significant changes are made (to note heavy refurbishing), GST needs to be paid on the profit margin in respect of the sale and not on the total value. No GST is charged if the selling price is lower than the purchase price. For the margin scheme to apply, the seller has to opt not to claim input tax credit on the purchase of the goods. The scheme is subject to many conditions, including those under Rule 32(5) of the CGST Rules, 2017. So it simplifies compliance and ensures that taxation is only levied on actual economic value added, which warrants the support of the second-hand goods trade without imposing the burden of additional taxes.
Applicability of Margin Scheme
The margin scheme is intended for second-hand dealers who buy and resell used items with the least amount of processing or value enhancement. It ensures that GST is only charged on the margin, the gap between the selling price and the purchase price, which also circumvents the aspect of double taxation on the total consideration. The primary practical applications will be
- Dealers in Second Hand Goods: Businesses that trade in used items such as cars, furniture, electronics, jewelry, and antiques.
- Repossession from Defaulting Borrowers: Further, the margin scheme can also be invoked by banks and financial institutions for the sale of repossessed property, whereby the purchase price is considered as the outstanding loan amount.
- The dealer must not have claimed Input Tax Credit (ITC) for the acquisition of second-hand goods; claiming ITC disqualifies the use of the margin scheme.
- Items Acquired from Unregistered Persons: The margin scheme can apply to goods that have been procured from unregistered suppliers subject to certain conditions.
- Refurbishment/Repair: If second-hand goods undergo substantial refurbishment or enhancement, the dealers shall be liable to pay GST on the entire sale price instead of only the margin.
- Specific Announcements: The scheme follows Rule 32(5) of the CGST Rules, 2017, and the relevant announcements of the Government that define the different categories and processes. Thus, the margin scheme provides a major lifeline to this sector by ensuring that only real economic gain attracts taxation.
Conditions to Avail Margin Scheme
Such prescriptions ensure the rightful action of the margin scheme and prevent misuse or wrong claims of tax credit. The requisite criteria are:
- Second Hand/used/old/refurbished, especially applicable to movable goods like used cars, furniture, electronics, and jewelry.
- No Input Tax Credit (ITC) should have been availed with any second-hand goods by purchasing ITC on the purchase, disqualifying the benefit of the margin scheme.
- Minimal processing is permitted, that is selling in original condition with minor repairs or refurbishments that do not change the essence of the items. Most enhancements would attract GST on the whole transaction value.
- Ideally bought from either non-registered persons or registered people who have not claimed ITC on those goods.
- Each transaction has to be clear on price and sale prices, with the margins generated in sales.
- Compliance with Rule 32(5) of the CGST Rules, 2017 is necessary; where the selling price is less than the purchase price, no GST is applicable on the negative margin.
- For other scenarios like repossession, the deemed purchase price of repossessed items to a nonregistered borrower will be the loan amount owing, less any repayments made.
Scope of Supply and Valuation for GST under Margin Scheme
Scope of Supply under Margin Scheme
GST defined the term ‘supply’ to mean any type of sale, transfer, barter, exchange, license, rental, lease, or disposal made for a consideration during the course or furtherance of business.
The margin scheme includes second-hand products supplied by dealers who import and export these goods. Banks and NBFCs repossess items from borrowers who default on repayment.
The supplier should be an authorised second-hand products dealer. The products should not have undergone any processing or manufacturing to a significant extent that could change their original state. The transaction should not be subject to the sale of goods acquired using input tax credit. Supply arises even though the items are procured from an unregistered person.
Thus, even though the total sale price is applicable for an ordinary sale, the value for tax purposes, in the case of second-hand products, would be only the margin (i.e., the economic gain) accrued from the supply of such products.
Value under the Margin Scheme
The process of valuation varies from normal GST provisions and is regulated by Rule 32(5) of the CGST Rules, 2017.
The formula of valuation is:
Taxable Value = Selling Price – Purchase Price
When the margin (selling price minus purchase price) is positive, GST is payable on the margin.
When the margin is negative, no GST is payable (basically, the taxable value is treated as zero).
Special Valuation Cases
- Repossession for Defaulting Borrowers
- Purchase price is the loan amount outstanding as of the date of repossession, reduced by any payments made by the borrower.
- GST is payable on the difference between the selling price of the repossessed items and the determined “purchase price.”
Important Notes
Margin scheme avoids a distinct tax invoice. The invoice will instead specify that the supply is made under the margin scheme and that tax has been incorporated. The rate of GST varies with the category of product to be sold.
(e.g., 18% GST for second-hand mobiles and 12% – 18% for second-hand autos, depending upon category.)
How to Calculate Value under Margin Scheme?
The margin scheme is to be applied with the following specific considerations:
- When applying the margin scheme, the dealer should not have claimed any input tax on the goods purchased.
- The invoices should state “GST is under the margin scheme” without demarcating the amount.
- Taxes have to be excluded from the margin. Ordinarily, it is assumed for the purpose of calculations that the sale price is inclusive of GST and therefore the tax component will only be stripped as and when necessary.
How to Value –
- Determine Purchase Price. The price at which the dealer first acquired the second hand goods shall be the purchase price. In case of goods repossessed from a defaulter, the purchase price shall be determined with reference to the overriding loan amount less any payments duly made by the borrower prior to repossession.
- Determine Selling Price. It is the final price charged to the customer by the dealer for the retailing of the goods. This should be the amount which is actually and truly received, except where otherwise allowed, without consideration for tax.
- Calculate the Margin. The formula for this is: Margin = Selling Price – Purchase Price.
- Determine if GST is applicable in the margin. GST becomes applicable on the positive margin, that is, when the selling price exceeds the purchase price. Zero or negative margin: No GST is levied if selling price is equal to or less than purchase price (taxable value is deemed zero).
- Apply the correct GST Rate. The applicable GST rate will differ depending on the category of goods sold; for example 18% for second hand mobile phones and 12% or 18% for second hand cars.
Note: For purposes of the marginal scheme, GST is regarded as included in the margin, unless specifically noted otherwise.
Repossession Specific Rule
In the event of repossessed items, particularly for banks or NBFCs:
Purchase price = Outstanding dues (loan) – payments received.
GST is only levied if the resale value is more than the calculated purchase price.
Illustration
An old cell phone was purchased for ₹10,000 and sold to a customer for ₹12,000. The applicable GST rate is 18 percent.
The calculation is as follows:
Margin is the Selling Price less the Purchase Price, that is, ₹12,000 – ₹10,000 = ₹2,000.
Only the margin of ₹2,000 will be liable for GST since it is positive.
Thus, the GST amount is ₹360, that is, 18 percent of ₹2,000.
Hence, the GST payable by the trader for the transaction will be ₹360.
It is pertinent to note that had the selling price been below the purchase price (say, ₹9,000) GST would not have been charged.
Benefits of Margin Scheme
- Double taxation is avoided: GST is levied on the profit margin, i.e., the difference between the sale price and the purchase price; thus it will not be charged on the entire sale value. This avoids the taxability of the same good twice.
- Reduced Tax Burden: Being charged on the margin, which is less than the total price, GST is called a lesser burden and is borne by consumers and dealers alike.
- Supports Second Hand Market: Tax exemptions given to second-hand goods such as cars, electronics, and furniture lower their price and make them more accessible.
- Simple Compliance: Dealers do not need to claim or account for Input Tax Credit (ITC) on these goods, thus making it simple for accounting and compliance.
- Environmental Recycling and Sustainability: The second-hand product thereby becomes cheap and accessible, thereby encouraging environmentally sustainable activities through reuse.
- Friendly for Financial Institutions: Banks and Non-Banking Financial Companies (NBFC) dealing with repossession get a facility for toll recovering dues without attracting huge tax liabilities.
Conclusion
The GST margin scheme provides a reasonable and pragmatic taxing mechanism for second-hand goods traders, taxing only the actual profit made, as opposed to taxing the entire transaction value. This method decreases the tax liability while encouraging reusable and resalable goods, contributing toward a sustainable and more economical marketplace. Compliance is, therefore, made simpler as input tax credit claims are not filed, thus supporting the development of the second-hand sector. Hence, it can be said that the margin scheme contributes to both economic engagement and environmental protection under the GST framework in India.
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