Normally Value of supply of goods or services or both shall be transaction value; however, in respect of second hand goods, a person dealing is such goods may be allowed (option) 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.

Legal Provisions:

Levy & Collection are discussed in Section 9 of CGST Act, 2017

As per Section 9(1) of the CGST Act, 2017, Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty percent, as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

Can Second Hand Dealer Opt for GST Composition Scheme

As Per Section 15(1) of the CGST Act, 2017, Value of supply of goods or services or both shall be transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

As Per Section 15(4) of the CGST Act, 2017, where the value of the supply of goods or services or both cannot be determined under Section 15(1), the same shall be determined in such manner as may be prescribed. Valuations rules are prescribed under Chapter IV of the CGST Rules, 2017 from Rule 27 to Rule 35.

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.

Interpretation to the Margin Scheme Valuation

Rule 32(5) flows from Section 15(4) which applies “ONLY TO” cases covered by Section 9 of the CGST Act, 2017.

Composition Levy – Section 10

Section 10 of CGST Act, 2017 starts with a non-obstinate clause providing: “Notwithstanding anything to the contrary contained in this Act but subject to provision of sub sections (3) & (4) of section 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed one crore and fifty lakh may opt to pay, in lieu of the tax payable by him under section 9(1),** an amount calculated at such rate as may be prescribed, but not exceeding

…….

** Amended vide CGST Amendment Act, 2018

Prior to CGST Amendment Act, 2018, section 10(1) provided that composition tax was in “lieu of tax payable by him.”

Hence one can argue that, composition dealer can pay tax on the basis of Rule 32(5) by opting margin Scheme.

Notification No. 8/2017- central tax dated 27.06.2017 was amended by notification No. 1/2018 – central tax dated 01.01.2018 composition tax would be calculated as under:

(iii) Half Percent of turnover of taxable supplies of goods in the stat in case of other suppliers

For the Purpose of Section 10, neither value of taxable supplies has been specified for the purpose of payment of tax. For this one may have to refer again section 15 for the value of taxable supply which in turn again contradicts the above provisions.

Analysis:

Ø  Person dealing in Second hand goods cannot opt the composition scheme and pay tax on the value prescribe under Rule 32(5). As Rule 32(5) flows from Section 15(4) which applies ONLY TO” cases covered by Section 9 of the CGST Act, 2017 NOT by Section 10.

Ø  Merely similarity of Non availment of Input Tax Credit under Rule 32(5) & Section 10 doesn’t make Taxable Registered person dealing in second hand goods liable to opt composition scheme

Ø  Government must notify separate valuation rules for the composition scheme dealers.

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4 Comments

  1. Aditya Niburani says:

    The conditions prescribing eligibility for Composition scheme are provided by Section 10(2) which nowhere restricts any person dealing in secondhand goods to opt for composition scheme.
    Whether non-eligibility of a person to use benefit of margin scheme under Rule 32(5) can make him ineligible to opt for the composition scheme – Answer is a No…. If at all it is assumed for once that the dealer is not eligible to utilize margin scheme as per Rule 32(5) he can still pay tax on the entire sale consideration at the rates prescribed under Rule 7 of the CGST Rules if he opts for composition scheme.

    Regarding availability of margin scheme under Rule 32(5) to a composition dealer :

    Section 10 says that a composition dealer shall pay ‘in lieu of the tax payable by him under sub-section (1) of section 9, an amount of tax calculated at such rate as may be prescribed”…(Prescribed by Rule 7 of CGST Rules 2017)

    Rule 7(3) says tax shall be payable at half per cent (equivalent 0.5 percent SGST also applicable) of the “turnover of taxable supplies of goods and services in the State or Union territory”

    Now as per Section 2(112) definition of “turnover in State” or “turnover in Union territory” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess;

    Now on reading Section 2(112) one may discern that TURNOVER IN A STATE includes VALUE OF TAXABLE and exempt supply . Therefore for Rule 7(3) TAXABLE TURNOVER IN A STATE may be inferred to mean only value of taxable supplies.

    And value of taxable supplies is governed by Section 15 and corresponding rules one of which is Rule 32(5). Thus a composition dealer may shall have to resort to Section 15 for valuation purposes basis the above chronology and therefore also Rule 32(5)- Margin scheme may be referred to for deriving the value of taxable supplies on which tax shall be payable at 0.5% CGST & 0.5% SGST

  2. Aditya Niburani says:

    In my humble opinion the composition dealer can be a dealer in 2nd hand goods as there is no such restriction as prescribed by Section 10(2) of the CGST Act, 2017. The above article in conclusion mentioned that as when dealer cannot use the margin scheme as per Rule 32(5) he cannot opt for composition scheme.

    Availability or non-availability of margin scheme under Rule 32(5) cannot be a deciding factor for being eligible to opt composition scheme.

    Availability of margin scheme to a composition dealer is a different aspect altogether – availability or non-availability of it is a secondary question

    1. Aditya Niburani says:

      Regarding availability of margin scheme under Rule 32(5) to a composition dealer :

      Section 10 says that a composition dealer shall pay ‘in lieu of the tax payable by him under sub-section (1) of section 9, an amount of tax calculated at such rate as may be prescribed”…(Prescribed by Rule 7 of CGST Rules 2017)

      Rule 7(3) says tax shall be payable at half per cent (equivalent 0.5 percent SGST also applicable) of the “turnover of taxable supplies of goods and services in the State or Union territory”

      Now as per Section 2(112) definition of “turnover in State” or “turnover in Union territory” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess;

      Now on reading Section 2(112) one may discern that TURNOVER IN A STATE includes VALUE OF TAXABLE and exempt supply . Therefore for Rule 7(3) TAXABLE TURNOVER IN A STATE may be inferred to mean only value of taxable supplies.

      And value of taxable supplies is governed by Section 15 and corresponding rules one of which is Rule 32(5). Thus a composition dealer may shall have to resort to Section 15 for valuation purposes basis the above chronology and therefore also Rule 32(5)- Margin scheme may be referred to for deriving the value of taxable supplies on which tax shall be payable at 0.5% CGST & 0.5% SGST

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