Mr. Rohit purchases a car for Rs. 10 lakhs, and it includes a GST amount of Rs. 2 lakhs. Now, if he resells it after 4 years for Rs. 5 lakh then if GST is imposed on such Rs. 5 lakh then it leads to double taxation.
Therefore there is a need to define rules for the purchase and sale of second-hand goods and thus Margin scheme is made available.
What Is Margin Scheme?
Margin scheme is for persons who deals in the purchase and sale of second-hand goods. Under this scheme, GST is payable only on the margin difference between the purchase and sale price of the second-hand goods.
When the second hand goods dealer purchases such goods from an unregistered person then no GST is levied. (Notification No.10/2017-Central Tax (Rate)). In normal circumstances GST on reverse charge is payable on such transaction. When such product is sold then GST is payable on the difference amount between sale and purchase amount.
Such scheme is applicable only when there is no change or minor processing in the goods. If there is a change in the nature of goods then such scheme can not be applied. If there is a change in nature then GST is applicable on the whole amount. For example a jeweler purchases a gold ring and then melt it to make a chain, then tax is applicable on the whole amount, not on margin amount.
If the sales price less purchase price is negative then it will be ignored. For example if a dealer purchase two cars, in which he makes a profit of Rs. 50,000 in one and make loss of Rs. 20,000 on second one. The dealer has to pay tax on Rs. 50,000 only in such case.
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.
Value Of Purchase In Case Of Repossession From Defaulting Borrower
If the goods is repossessed from the defaulting borrower then purchase price (of second hand goods dealer) in such case will be calculated as Original Purchase price less Five percentage points for every quarter or part thereof.
GST Rates Applicable
Since there is no distinction between new goods and second hand goods under GST Law, the GST rates to be applied to used goods would be same as if they were new goods. For example if 28% gst rate is applicable on a car, then on sale of second hand car also 28% gst rate is applicable.
Dealer Acting As An Agent
If the second hand dealer is not purchasing and selling goods but acting as an agent for seller to find the buyer then such scheme is not applicable on such dealer. GST at the rate of 18% is applicable on the commission received by dealer either from the seller or from the buyer.
When goods are purchased from a registered dealer
If a dealer purchase second hand goods from another registered dealer then gst is to be collected by selling dealer. And the gst paid by purchasing dealer is allowed as input tax credit to him as per normal ITC rules.
The selling dealer also has to pay gst on the margin amount and not the full value.
Points still need to be cleared
The dealer which is selling the second hand goods to customer has to pay tax on his margin only. GST rate and gst amount is to be shown in the invoice. Therefore, the purchase of goods can determine the margin amount of the seller. And no seller wants to let the purchaser know his margin for obvious reasons.
Rule 32(5) of the Central Goods and Services Tax (CGST) Rules, 2017, provides that where a taxable supply is provided by a person dealing in buying and selling of second hand goods or 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. This is known as the margin scheme.