Demystifying GST On Used Goods

Normally GST is charged on the transaction value of the goods. However, in respect of second hand goods (Used 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. 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. In this article we will discuss the related concepts in detail.

VALUATION OF SECOND-HAND GOODS

* In case of Capital Goods such as refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, tax shall be paid on the transaction value and the method of comparison shall not apply.

# In case of Capital Goods lost or destroyed due to any accident or are gifted to any unrelated person, there is no consideration and hence in such case, only ITC attributable to the remaining life to be paid.

TRANSACTION VALUE

Under GST law, taxable value is the transaction value i.e. price actually paid or payable, provided the supplier & the recipient are not related and price is the sole consideration. In most of the cases of regular normal trade, invoice value will be the taxable value. However, to determine value of certain specific transactions, Determination of Value of Supply rules have been prescribed in CGST Rules, 2017.

Compulsory Inclusions- Any taxes, fees, charges levied under any law other than 239 GST law, expenses incurred by the recipient on behalf of the supplier, incidental expenses like commission & packing incurred by the supplier, interest or late fees or penalty for delayed payment and direct subsidies (except government subsidies) are required to be added to the price (if not already added) to arrive at the taxable value.

Exclusion of discounts- Discounts like trade discount, quantity discount etc. are part of the normal trade and commerce, therefore pre-supply discounts i.e. discounts recorded in the invoice have been allowed to be excluded while determining the taxable value. Discounts provided after the supply can also be excluded while determining the taxable value provided two conditions are met, namely – (a) discount is established in terms of a pre supply agreement between the supplier & the recipient and such discount is linked to relevant invoices and (b) input tax credit attributable to the discounts is reversed by the recipient.

Margin Scheme in GST FOR 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 = Selling Price – [Purchase price + Minor repairing cost]

In case a motor vehicle is sold by a registered person who has claimed depreciation u/s 32 of the Income Tax Act:

The margin for the purpose of GST computation shall be = Selling price of Motor Vehicle- Depreciated value of the motor vehicle on the date of sale as per Income Tax act; If the margin is negative, it shall be ignored.

In any other case:

Margin shall be = Selling Price – Purchase Price (as discussed earlier in this article); and where such margin is negative, it shall be ignored.

Valuation of Goods repossessed from defaulting borrower

What is repossessed goods

In the business of lending, hypothecation of goods and security of assets play vital role in the event of default in repayment of the loan. In such cases, the goods/assets would be repossessed or attached as a part of recovery of the outstanding loan amount. Taking over of goods by the lender from the defaulting borrower is termed as repossession and accordingly known as repossession of goods.

Sale of repossessed goods

It is a general practice in the industry to sell off the repossessed goods by way of sale or auction. Whether the same would be treated as supply and GST would be attracted has to be evaluated. Sale of repossessed goods is made for a consideration in the course of business, therefore, it would be conveniently covered within the scope of supply and will be chargeable to GST. This was further clarified by Question No.63 in FAQ issued by the CBIC on Banking, Insurance and stock brokers sector dated 27.12.2018.

Valuation on Sale of Repossessed Goods

The proviso to the above rule further provides that in case of the purchase value of goods repossessed from an 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.

Purchase price of second-hand goods = Original Purchase Price of defaulting borrower- 5% depreciation for each quarter or part thereof

Valuation when the repossessed goods are sold to related party

In case of supply made to related parties, the value of supply shall be determined as per Rule 28 of the CGST Rules, 2017. The said Rule requires determination of value based on the open market value and in case of non-availability of open market value then the other methods of valuation as provided therein should be adopted. Whereas Rule 32(5) of the CGST Rules, 2017 specifically provides valuation mechanism for repossessed goods. In a case where repossessed goods are further sold by the lender to a related party, the adoption of valuation mechanism will become a dispute.

Applying the legal maxim “Generalia specialibus non derogant” which means specific provision shall over general provisions in a statute it can be concluded that Rule 32(5) of the CGST Rules, 2017 shall apply when the repossessed goods is sold to related party since it is a more specific rule as compared to Rule 28 of the CGST Rules, 2017.

Rcm on purchase of USED goods from unregistered person      

In this regard, Notification No.10/2017-Central Tax (Rate) New Delhi, dated 28th June, 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.

Rate of Tax ON SUPPLY OF USED GOODS

GST rates on second-hand Motor Vehicles:

In general, the rate of tax on supply of goods shall be the rate applicable to the said goods under Notification No. 01/2017-Central Tax (Rate) dated 28.06.2017. In general, the rate of GST on sale of motor vehicles is 28%. However, Notification No. 08/2018-Central Tax (Rate) dated 25.01.2018 provides specific exemption in respect of old and used vehicles from so much of tax as in excess of tax computed on the margin.

Notification No. 8/2018 -Central Tax (Rate) New Delhi, the 25th January, 2018 G.S.R. 82(E) reads a follows:-

In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts the central tax on intra-state supplies of goods, the description of which is specified in column (3) of the Table below, falling under the tariff item, sub-heading, heading or Chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), as are given in corresponding entry in column (2), from so much tax as specified in Schedule IV of Notification No. 01/2017-Central Tax (Rate) dated 28.06.2017, as is in excess of the amount calculated at the rate specified in the corresponding entry in column (4), of the said Table, on the value that represent margin of the supplier, on supply of such goods.

S.No.	Chapter, Heading, Sub‑ heading or Tariff item	Description of Goods	Rate
1.	8703	Old and used, petrol Liquefied petroleum gases (LPG) or compressed natural gas (CNG) driven motor vehicles of engine capacity of 1200 cc or more and of length of 4000 mm or more. Explanation. – For the purposes of this entry, the specification of the motor vehicle shall be determined as per the Motor Vehicles Act, 1988 (59 of 1988) and the rules made there under.	18%
2.	8703	Old and used, diesel driven motor vehicles of engine capacity of 1500 cc or more and of length of 4000 mm Explanation. – For the purposes of this entry, the specification of the motor vehicle shall be determined as per the Motor Vehicles Act, 1988 (59 of 1988) and the rules made there under.	18%
3.	8703	Old and used motor vehicles of engine capacity exceeding 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles. Explanation. – For the purposes of this entry, SUV includes a motor vehicle of length exceeding 4000 mm and having ground clearance of 170 mm. and above.	18%
4.	87	All Old and used Vehicles other than those mentioned from S. No. 1 to S.No.3	12%

Explanation –For the purposes of this notification, –

(i) in case of a registered person who has claimed depreciation under section 32 of the Income-Tax Act,1961(43 of 1961) on the said goods, the value that represents the margin of the supplier shall be the difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply, and where the margin of such supply is negative, it shall be ignored; and

(ii) in any other case, the value that represents the margin of supplier shall be, the difference between the selling price and the purchase price and where such margin is negative, it shall be ignored.

2. This notification shall not apply, if the supplier of such goods has availed input tax credit as defined in clause (63) of section 2 of the Central Goods and Services Tax Act, 2017, CENVAT as defined in CENVAT Credit Rules, 2004 or the input tax credit of Value Added Tax or any other taxes paid, on such goods.

GST rates on second-hand goods other than vehicles

No distinction will be made between the sale of second-hand goods and new goods under GST as regards the rates of GST. If any new article is sold at the rate of 18%, then the re-sale of such used article will also be subject to 18% tax under Margin Scheme. The only exception is in the case of motor vehicles as discussed under Notification No. 08/2018- Central Tax.

GST RATES FOR Second-hand goods dealer working as an agent

If the second-hand goods dealer is not directly indulged in purchase and sale of second-hand goods but facilitating only the sale of such goods for commission, ‘Margin Scheme’ shall not apply to him. In this case, he shall be liable to pay GST at the rate of 18% on the commission earned by him on crossing the turnover threshold (Rs. 20 Lakhs/ 10 lakhs) as prescribed under CGST Act, 2017.

LIABILITY TO REGISTER

GST being a tax on the event of “supply”, every supplier needs to get registered. However, small businesses having all India aggregate turnover below:

(i) Rupees 40 Lakh (in case of exclusive supply of goods) Rupees 20 lakh if business is in the States of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Telangana, Tripura and Uttarakhand) and

(ii) Rupees 20 lakhs (in case of supply of services or in case of mixed supplies) (Rupees 10 lakh if business is in States of Manipur, Mizoram, Nagaland and Tripura) need not register.

A person selling secondhand goods shall get registered when his taxable supply i.e. Transaction Value or Margin Money as the case may be exceeds the threshold limit as specified above. In case a dealer of second hand goods pays the GST on Margin Money, she shall get registered under GST when the difference between Selling Price and Purchase Price exceeds Rs. 40 Lacs or 20 Lacs in case of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Telangana, Tripura and Uttarakhand.

For example, X dealing in Motor Vehicles sold a Car to Mr. Y for Rs. 10 Lakhs on 01-01-2022. The Car was purchased by X for Rs. 9.50 Lacs. Taxable value for calculating the turnover to determine the threshold limit of 40 lacs shall be Rs.50000 [Rs.10,00,000 – Rs.9,50,000].

Further,

(i) The small businesses, having turnover below the threshold limit can, however, voluntarily opt to register.

(ii) The aggregate turnover includes supplies made by him on behalf of his principals, but excludes the value of job-worked goods if he is a job worker.

(iii) if the supplier supplies outside the State, he is required to take registration irrespective of the size of his turnover. However, this compulsion is relaxed for certain categories of suppliers like supplier of handicraft goods, supplier of services, supplier of job work services. If the turnover of the handicraft supplier is less than specified threshold limit, they will not be required to register, even if they supply such goods outside the State. In such cases they will also not be required to obtain registration as a casual taxable person in other States for making supply of the handicraft goods.

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Disclaimer : The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice, but only after a thorough examination of the particular situation.