Introduction
To eliminate the cascading effect, the government had introduced GST. but After the introduction of GST, one of the most convoluted issues was ‘Tax implication on sale of used or second-hand goods’. Because these second-hand goods have already borne the incidence of tax. To avoid double taxation on the supply of goods that have already been taxed, the government introduced the marginal scheme.
Mostly, GST is collectable on the transaction value which is the price paid or payable for the supply of goods and services. But in this scheme, GST is calculated on the difference between the value at which the goods are supplied and the price at which the goods are purchased i.e. profit margin.
What is Margin Scheme
In the “Margin Scheme” taxpayers who are dealing in second-hand or used goods, may at his option, discharge tax on the sale of used or second-hand goods on the margin amount which is the difference between the selling price and purchase price of the goods. The margin scheme is non mandatory for the taxpayer. Further, the taxpayer opting for the margin scheme is bolted from availing input tax credit, if any paid on the goods being sold under the margin scheme. Reference can be made to the Ruling issued in an application filed by Attica Gold Private Limited reported at 2020 (36) G.S.T.L. 445 (A.A.R. – GST – Kar.) wherein the Authority held that applicant cannot opt for margin scheme if input tax credit has been availed on the goods.
Margin Scheme has been introduced by Notification No. 10/2017- Central tax dated 28-06-2017 by making amendments in Rule 32(5) CGST Rules, 2017. Further, in the exercise of power given by Section 11 read with Section 15 of the CGST Act, the Government has issued Notification Number 08/2018-C.T.R., dated 25 January 2018 which provides for levy of GST at a concessional rate on margin amount in case of sale of second-hand motor vehicles. Further, the margin amount shall be the difference between the selling price and depreciated value calculated as per Section 32 of the Income Tax Act 1961 of the motor vehicle where depreciation on such motor vehicle has been claimed by the seller; and in other cases, it will be the difference between the selling price and purchase price.
Example:
M/s DEF Pvt. Ltd, which deals in second-hand cars, purchases a second-hand Car (Original price Rs. 3 lakh) for Rs. 2,00,000 from an unregistered person and sells the same in July 2017 for Rs. 2,50,000/-. The supply of the car to the company i.e. DEF Pvt. Ltd. for Rs. 2,00,000 shall be exempted and the supply of the same by company to its customer for Rs. 250000/- lakh shall be taxed and GST shall be levied. The value for GST purpose shall be Rs. 50000/-, i.e.Profit Margin.
For goods to qualify as second hand or used goods as per Rule 32(5) of the CGST Rules 2017 such goods need to be (Advance Ruling- RAJ/AAR/2018-19/35)
1. Used goods as such or goods after minor processing that does not change the nature of goods
2. Goods on which no input tax credit has been availed
Conditions for Availing Margin Scheme
1. Supply must be taxable
2. The supplier must be a second-hand goods dealers
3. the taxpayer opting for margin scheme is bolted from availing input tax credit
4. The nature of goods should not be changed after processing
Tax rate
The rate of tax under the marginal scheme will be the same as leviable on unused goods except in the case of motor vehicles for which Notification Number 08/2018-C.T.R., dated 25 January 2018 has been issued for payment of GST at a concessional rate on reduced value i.e. margin amount. The rate of GST on used cars is currently 12% and 18%. 12% for vehicles which are sub 4000 mm and 18% for vehicles above 4,000 mm.
The Federation of Automobile Dealers Association (FADA) therefore requests for a uniform GST rate of 5% on the margin for all used vehicles.
Issues to be resolved
ITC on expenses
Margin Scheme is applicable only when there is no change or minor processing (repairing/ refurbishing) of the goods. If such processing changes the nature of goods, the dealer cannot choose the ‘Margin Scheme’. Cost of repair, refurbishing, reconditioning, etc. borne by the dealer shall also be considered for calculating margin.
Further, there is a convoluted issue which is faced by the taxpayers who are dealing in second-hand or used goods. the Authority in the case of Deccan Wheels (Supra) has held that the Applicant dealing in second-hand or used motor vehicle will not be entitled to take ITC of any expenses incurred during the course of business. However, the Authority has not given any specific reasoning for reaching the conclusion in such a case, CBIC must clarify the eligibility of ITC on such expenses.
Inclusion of GST
Generally second-hand or used goods dealers do not collect tax amount separately from the customers and the department is of the view that tax will be payable over and above the margin amount. Here another convoluted issue arises that whether the sale price collected from the customers can be considered to be inclusive of GST payable on the margin amount.
It is appropriate to note that the various Courts in a plethora of judgments, in the erstwhile regime, have held that sale price will be deemed to be inclusive of tax if such tax is not separately collected.
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