GST on Sale of Second-hand Goods

The second-hand goods industry is growing at a rapid pace with more people engaging in budget friendly purchases now-a-days leaving behind the taboo of owning a second-hand product. Therefore, it is equally important to understand the tax impact at the time of sale and purchase of such second-hand goods so that later, litigation can be avoided.

Before we understand the tax impact on sale of second-hand goods, it is important to understand whether such sale of second-hand goods classify as “Supply” as per section 7 of the Central Goods and Services Tax Act, 2017 (‘CGST Act, 2017’). An extract of the provision of Section 7 is as follows –

“For the purposes of this Act, the expression ―supply includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;”

Thus, it is clear that all forms of supply of goods are included in the expression “supply” as per section 7. The provision nowhere bifurcates between sale of goods and sale of pre-owned/second-hand goods. Therefore, since it is established as per the law that the second-hand sale of goods would be a supply under GST, therefore it becomes important to understand the definition of “Goods” as per the law –

As per section 2(52) of the CGST Act, 2017, –

“Goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”

The word “Second-hand goods” are not separately defined in the GST law. Therefore, it can be understood that the same is included in the definition of goods as per section 2(52) of the CGST Act, 2017 and therefore is a supply under the GST Act, 2017.

Before diving deep in the subject of discussion, it become important to segregate the second-hand goods category in to two parts due to their peculiar tax treatments prescribed in the law –

– Sale of Second-hand Motor Vehicle and;

– Sale of all other Second-hand goods

The below article discusses the various tax implications associated when a person is engaged in the sale of pre-owned/used goods to another person –

Valuation of second-hand goods

As per Transaction Value – Under the GST law, the value of supply has been defined in section 15 of the CGST Act, 2017 which says that the value of supply shall be the transaction value, which is the price actually paid or actually payable for the said supply of goods or services or both provided that the buyer and seller are not related and the price is the sole consideration for the supply.

That means if for example – Mr. A supply his second-hand mobile phone to Mr. B for INR. 5,00,000/-, the taxable value as per Section 15 shall be INR. 5,00,000/- for the purpose of tax computation.

An important aspect to be kept in mind is where ITC of capital goods sold is taken by a taxpayer, then the provision of section 18(6) would be applicable to the taxpayer at the time of sale of such goods.

As per Margin Value – Further, drawing power from sub-section 5 of section 15 of CGST Act, 2017, a separate valuation mechanism has been prescribed under Rule 32 which is reproduced below –

“(1) Notwithstanding anything contained in the provisions of this Chapter, the value in respect of supplies specified below shall, at the option of the supplier, be determined in the manner provided hereinafter.”

(5) 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:

The important points to be kept in mind before application of the above rule is summarised as follows –

– The rule is discretionary in nature and the taxpayer is at liberty to exercise this option;

– A taxpayer opting for this rule, should be a dealer in buying and selling of second-Hand goods;

– The goods should be sold as such or with minor processing which does not alter the nature or does not enhance the value of such goods;

– Important condition is no ITC to have been claimed at the time of purchase of such goods;

– The Taxable value shall be arrived at Selling price – Purchase price – Minor Processing Charges, if positive, if the value is below 0, it should be ignored.

Repossessed goods from Defaulting Borrower

The first proviso to Rule 32(5) talks about the repossessed goods from a defaulting borrower. The purchase price of such goods by defaulting borrower shall be 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.

That means if for example – Mr. A supply goods re-possessed from Mr. B for INR. 5,00,000/-, on 31 March, 2024, the goods were purchased on 01 January, 2023 for INR. 4,00,000/-.

Now to arrive at the taxable Value – 4,00,000/- reduced by (5%*5 = 25%) i.e. INR. 3,00,000/-

Taxable Value shall be INR. 2,00,000/- (5,00,000-3,00,000)

In case of Sale of Second-hand Motor-Vehicle –

From a plain reading of Rule 32(5) of the CGST Rules, 2017, a connotation can be drawn that rule 32 sub rule 5 is only applicable to a person who is engaged in the business of buying and selling of second-hand goods. However, to extend the benefit of the Rule, the aforesaid rule has been extended to all the taxpayers with effect from January 25, 2018 vide Notification No.8/2018-Central Tax (Rate) for sale of second-hand motor vehicles.

Motor Vehicles when used for businesses are generally capitalised in the books of accounts, therefore an explanation has been inserted in the aforesaid notification whereby a specified valuation norms have been specified in case of depreciable assets –

“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

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.”

That means if for example – Mr. A supply his second-hand car to Mr. B for INR. 5,00,000/-, the purchase price of which was INR. 3,00,000/-, the Taxable value in such case as per Rule 32(5) shall be INR. 2,00,000 (5,00,000-3,00,000) for the purpose of tax computation.

In the above example, if the purchase price of the vehicle is INR. 6,00,000/- (5,00,000-6,00,000), then, the taxable value would be 0 as being negative.

Additionally, if in the same example, the depreciated value of the motor vehicle is INR. 1,00,000/-, then the taxable value shall be 4,00,000/-(5,00,000-1,00,000)

Rate of Tax on sale of second-hand vehicles –

Vide Notification No.8/2018-Central Tax (Rate) along with Notification No. 01/2018 – Compensation Tax (Rate) dated 25 January, 2018, exemption has been provided on the sale of motor vehicles for the specified tariff headings in case the supplier opts for margin scheme –

Tariff Heading	Description	Rate of Tax	Rate of Cess (Note: 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%	Nil
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%	Nil
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%	Nil
87	All Old and used Vehicles other than those mentioned from S. No. 1 to S.No.3	12%	Nil

Note: 1 Explanation: Nothing contained in this entry shall 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 credit as defined in CENVAT Credit Rules, 2004, or the input tax credit of Value Added Tax or any other taxes paid on such vehicles.

Changes in law vis-à-vis sale of second-hand goods

Particulars	Till 12 October 2017	From 13 October 2017 to 25 January 2018	From 25 January 2018 & Onwards
Rate of Tax	As Notified in NN 01/2017 – Central Tax (Rate)	65% of central tax applicable otherwise on such goods	Specified Rate
Valuation	Transaction value as per section 15	Transaction value as per section 15	Margin of supply as per Rule 32(5)
Condition	No condition	Such supplier had purchased the Motor Vehicle prior to 1st July, 2017 and has not availed input tax credit of central excise duty, Value Added Tax or any other taxes paid on such vehicles.	Such supplier has not availed input tax credit of central excise duty, Value Added Tax or any other taxes paid on such vehicles.
Notification	NA	NN 7/2017 – Compensation Cess (Rate) NN 37/2017 – Central Tax (Rate)	NN 01/2018 – Compensation Cess (Rate) NN 08/2018 – Central Tax (Rate)

Rate on sale of other capital Goods other than Motor Vehicles –

It has been clarified by way of issuance of a press release dated 15 July, 2017 that the Margin Scheme can be availed by any registered person dealing in buying and selling of second-hand goods and who satisfies the conditions as laid down in Rule 32(5) of the Central Goods and Services Tax Rules, 2017.

Further, as is the case with motor vehicle, where specified rates have been prescribed in the statute for charging supply of second-hand goods by way of issuance of notification, no such rates are separately prescribed for supply of other second-hand goods. That means, that the same rate as applicable to the supply of new goods as per Notification No. 01/2017 – Central Tax (Rate) would be applicable to the supply of second-hand goods of that category.

Sales by Registered/Unregistered persons –

Asset Use Type for seller	Supplier Registered	Recipient Registered	GST Applicability
Personal	No	No	No Tax – Not in the course or furtherance of business
Business	No	No	No Tax
Business	Yes	No	Tax Applicable – Forward Charge
Business	No	Yes	No –Notification No. 10/2017 – Central Tax (Rate) provided Rule 32(5) is followed.
Business	Registered	Registered	Tax Applicable

Other Important Points –

– Whether margin amount can be inclusive of GST? – The department is of the view that tax will be payable over and above the margin amount. (Deccan Wheels – 2022 (57) G.S.T.L. 74 (A.A.R. – GST – Mah.))

– Whether Rule 32(5) can be applied on sale of second held jewellery? – In the case of applicant dealing in second-hand gold jewellery which are purchased from individuals who are not registered under GST and there is no change in the form and nature of such goods, valuation of the same can be made as prescribed under Rule 32(5) of CGST Rules, 2017. – (Aadhya Gold Pvt. Ltd. – 2021 (54) G.S.T.L. 438 (A.A.R. – GST – Kar.))

– Turnover Limit for GST Registration – For the purpose of dealers engaged only in supply of second-hand goods, how the the turnover will be calculated i.e., basis the Gross Amount or the Margin Amount is still ambiguous. A conservative approach would be to consider the gross amount for the purpose of registration.

– Whether margin amount must be considered qua each transaction? – The margin amount is to be considered for each item separately. Therefore, it is equally important that an exhaustive itemised list is prepared to correlate sales and purchase transactions.

– Reporting in GSTR 1/GSTR 3B – Even after 7 years of GST implementation, the clarity as to reporting of turnover in case a person opts for margin scheme is not provided by the department. Generally, the industry practice is to report Gross Taxable Value and further bifurcating the value into two groups 0% for the purchase Value and 18%/ or whatever rate applicable for the Margin Value.

Though the implementation of Margin Scheme for second-hand goods dealer is a big relief, however ambiguities in certain areas are still challenging the business functions. Notices are being issued to the taxpayers to establish the correlation between sales and purchase on the face of the invoice only. If a businessman would show his purchase price on the face of the invoice, then the buyer would always have an upper hand when it would come to negotiating the transaction.

Further confusion regarding registration turnover limit and returns reporting is another aspect where clarification is required. A suitable clarification on the above points is expected from the department in this regard in the near course.

This article is based on the writer’s personal views and interpretation of the Act/Rules/Notifications. The writer does not accept any liabilities for any loss or damage of any kind arising out of information and for any actions taken in reliance thereon. This article has been published for knowledge sharing purpose only.

The author is a practicing Chartered Accountant with an overall 8 years’ experience in both Industry as well as an independent practice and can also be reached at priyalmalpani@gmail.com.