The Secret Behind The Calculation of GST On Second Hand Goods I Margin Scheme I TaxAddicters

Howdy TaxAddicters!

 Introduction / Background: 

Normally GST is charged on the transaction value of the goods. However, in respect of second hand goods, a person dealing in 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. The purpose of the 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. 

Valuation of Second Hand Goods: 

As per 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. 

Value of Second Hand Goods:

When ITC is not availed [Margin Scheme]:

• Value = Selling price - Purchase price 

• Selling price < Purchase price ⇒ Ignore negative value                              

• CGST on second hand goods received from unregistered supplier exempt 

When ITC is availed:

• Normal valuation as per other applicable provisions

Crux:

✪ Persons who purchase second hand goods after payment of tax to supplier of such goods, are governed by this valuation rule only when they do not avail ITC on such input supply. If ITC is availed, then such supply is governed by normal GST valuation provisions. 

✪ Margin scheme is available only for supply of used goods by a person dealing in buying and selling of second-hand goods

Also Read: GST on Train ticket cancellation charges

Old and used motor vehicles : 

Different rates of taxes have been prescribed for old and used vehicles depending upon the size and engine capacity of such motor vehicles and value of supply in such case, 

Case I: when ITC is not availed:

 (i) In case of a registered person who has claimed depreciation under section 32 of the Income-Tax Act,1961on the said goods, 

• Value = Consideration received - Depreciated value on the date of supply, 

• Consideration < Depreciated value ⇒ Ignore negative value 

(ii) In any other case 

• Value= Selling price - Purchase price 

• Selling price < Purchase price ⇒ Ignore negative 

Case II: when ITC is availed:

value When ITC is availed Normal valuation as per other applicable provisions. 

Purchase value of supply of goods repossessed from a defaulting borrower

Many a times goods taken on loan are repossessed by the lender in the event of default in payment of the loan. The purchase value of such repossessed asset is:-

If the defaulting borrower is un-registered:

Purchase value = Purchase price in the hands of such borrower reduced by 5% for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession

If the defaulting borrower is registered:

The repossessing lender agency will discharge GST at the supply value without any reduction from actual/notional purchase value

Also Read: What is Rule 86B under GST(Restriction on ITC utilization)

Illustration 1: 

For instance, a company say M/s First Source Ltd, which deals in buying and selling of second hand cars, purchases a second hand Maruti Celerio Car of March 2019 make (Original price R 5 Lakh) for R 3 Lakh from an unregistered person and sells the same after minor furbishing in July 2019 for R 3.5 Lakh. 

The supply of the car to the company for R 3 Lakh shall be exempted and the supply of the same by the company to its customer for R 3.5 Lakh shall be taxed and GST shall be levied. The value for GST purpose shall be R 50,000/- i.e. the difference between the selling and the purchase price of the company. 

In case any other value is added by way of repair, refurbishing, reconditioning etc., the same shall also be added to the value of goods and be part of the margin. 

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.

Illustration 2: 

M/s VK & Associates, dealing in sale/purchase of used or second hand cars, is registered under GST. During the current financial year, it effected following intra-state transactions 

Particulars	Purchase Price	Sale Price
Car 1	5,00,000	7,50,000
Car 2	3,00,000	2,75,000
Car 3	6,00,000	6,50,000
Car 4	8,00,000	9,50,000

Car 4 from registered person who charged GST of Rs.1,44,000 and accordingly, M/s VK & Associates had availed the input tax credit of the same. What will be the GST liability if GST rate is @18%.

Solution:  As per the above provisions, the computation of GST liability is as follows -

Particulars	Purchase Price	Sale Price	Margin Scheme (Sale Price - Purchase Price)	Value when ITC availed	Value of second hand Cars	GST @18%
Car 1	5,00,000	7,50,000	2,50,000	-	2,50,000	45,000
Car 2	3,00,000	2,75,000	-	-	-	-
Car 3	6,00,000	6,50,000	50,000	-	50,000	9,000
Car 4	8,00,000	9,50,000	-	9,50,000	9,50,000	1,71,000

 

The GST Liability = 81,000

( 45,000+9,000+1,71,000-1,44,000).

With this, see you in the next post.

Ta da!

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