With reference to the activity of sale of repossessed goods by an NBFC, there are certain aspects in the GST law which require further evaluation. This article analyses various implications under the GST law and the possible interpretations, on the activity of sale of 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.
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. 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.
Rule 32 of the CGST Rules, 2017 is a non-obstante clause under the valuation chapter, which provides the valuation mechanism in respect of certain specified supplies. Specifically, Rule 32(5) of the CGST Rules, 2017 reads as follows:
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:
Provided that the purchase value of goods repossessed from a defaulting borrower, who is not registered, 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.
The real essence of Rule 32(5) of the CGST Rules is to tax only on the margin earned by the dealer of second hand goods. This provision appears to factor the impact of loss of input tax credit on purchase of such used goods. The benefit of payment of tax on the margin/profit element under Rule 32(5) of the CGST Rules, 2017 would be available only if all of the following conditions are satisfied
1. Person must be dealing in buying and selling of second-hand used goods (including repossessed goods)
2. It is a sale of used goods as such or after minor processing without changing the nature of the goods
3. No input tax credit should have been availed on the purchase of such goods.
On a prima facie view, it appears from the above rule that it shall be applied only in respect of “person dealing in buying and selling of second hand goods”. However, the proviso following the rule talks about the method of determining the purchase value in case of repossessed goods from a defaulting borrower. If we interpret Rule 32(5) of the CGST Rules, 2017 to mean to include only the activities of buying and selling of second hand goods, it would make the proviso redundant.
A proviso is resorted to provide conditions or riders to the main provisions. Its function is to carve out an exception or exclusion to the main provision, which otherwise would have been in the main section. The Hon’ble Supreme Court in the case of Sales Tax Commissioner v. B.G. Patel [1995 (1) TMI 311 – SC] has held that it is settled law that the proviso and the main part of the Act or Rule are to be harmoniously read together and interpreted to give effect to the object of the provision. It should not render itself otiose or ineffective.
It is well settled principle that a statute never waste words in a statute as held by the Hon’ble Supreme Court in the case of Visitor Amu v. K.S.Misra [2007 (8) SCC 594]. Also, it is well established principle of interpretation denoted by the legal maxim “ut res magis valeat quam pereat” which means that a statute should be read to make it effective and operative rather than rendering it redundant. This principle was also upheld by the Hon’ble Supreme Court in the case of Corporation of Calcutta v. Liberty Cinemas [AIR 1965 SC 1107].
Going by the above principle of interpretation, though one can argue that the provision primarily applies only to a reseller of used goods, it may be concluded that Rule 32(5) has a deeming fiction to include within its ambit sale of repossessed goods also.
In case of repossessed goods from a defaulting borrower (who is not registered), purchase price in the hands of the seller would be the original purchase price of the goods by the defaulting borrower reduced by five percentage for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession.
For instance, a vehicle is purchased in January 2019 for Rs.60,000/-, under finance by a lender. The borrower defaults payment of loan amount and vehicle was taken over by the lender in December 2019. The vehicle so repossessed had been sold in the month of March 2020 for Rs.50,000/-. In this situation, the purchase price to be considered in the hands of the lender would be Rs.45,000/- [i.e. 60,000 – (60,000 * 5% * 5)], considering 5 quarters from the date of purchase. The taxable value under Rule 32(5) of the CGST Rules,2017 for the said transaction would be Rs.5,000/-.
The above proviso can be applied only when the defaulting borrower is an unregistered person. There is no explicit proviso provided for determining the purchase price, when the defaulting borrower is a registered person. As discussed earlier, the main provision under Rule 32(5) of the CGST Rules,2017 would cover the transaction of sale of repossessed goods within the meaning of the term ‘buying and selling of second hand goods’. Absence of a specific proviso would not make the rule inapplicable to the said transaction. In fact, it means that there are no exceptions carved out for the said transaction and the valuation has to be determined on the basis of the main provision itself i.e. Rule 32(5).
Since the manner to determine purchase price has not been explicitly provided for such transactions, by logical reasoning, one can consider the extent of default to be the purchase price of the repossessed goods. It would also correlate with the accounting treatment provided in the books of the lender, where the outstanding loan from such defaulting borrower would be transferred and accounted as repossessed goods. An illustrative accounting treatment could be as under
Dr. Repossessed Good (Asset A/c)
Cr. To Loan Receivable (Asset A/c)
Since the lender does not pay any price for the repossessed goods, the reasonable rationale which can be considered is to treat the outstanding loan amount as the effective purchase price of the lender. Therefore, the valuation in case of sale of repossessed goods from a registered borrower could be computed as the difference between the sale price and the effective purchase price (i.e. amount of loan in default).
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.
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. In other words, the effective tax payable on sale of repossessed goods would be the rate of tax provided in Notification No.08/2018-Central Tax (Rate) on the amount of margin. Where such margin is negative, no tax would be payable.
Summary of the effective rate of tax under the said notification is as under
|HSN||Description of Goods||GST Rate|
|8703||Old and used, petrol Liquefied petroleum gases (LPG) or compressed natural gas (CNG) driven motor vehicles of engine capacity of 1200cc or more and of length of 4000mm or more.||18%|
|Old and used, diesel driven motor vehicles of engine capacity of 1500cc or more and of length of 4000mm|
|Old and used motor vehicles of engine capacity exceeding 1500cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles|
|87||All Old and used Vehicles other than those mentioned above||12%|
As per Section 2(28) of the Motor Vehicles Act,1988 the term ‘motor vehicle’ has been defined to mean any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding twenty-five cubic centimetres.
In a nutshell, in case of sale of repossessed goods, the value of supply would be determined based on the defaulting borrower’s registration status. In case the defaulter is an unregistered person, then the purchase price would be based on the proviso given under Rule 32(5) and in case where the defaulter is registered, the purchase value can be adopted based on the rationale of effective cost to the lender. The rate of GST to be adopted for sale of repossessed goods (other than motor vehicles) would depend on the rate as applicable to said product. In case of motor vehicle covered under Notification No.08/2017-Central Tax (Rate), the effective rate would be in accordance with the said notification.
Acknowledgements: Special thanks to Mr. Shekhar NRS (Asst. General Manager-Taxation in a renowned NBFC) for sharing Industry insights.