Margin Valuation scheme in GST – Valuation on Second hand goods

Generally, the GST has to be discharged on transaction value i.e. the value which has to be paid by the recipient to supplier if the following conditions are satisfied.

1. The recipient should not be a related person

2. The value is the sole consideration for the supplier

However, there is an exception for the above valuation mechanism that is Margin valuation scheme.

At the outset, we have to understand what is margin valuation scheme. The word Margin itself specifies that Net profit (The difference between Purchasing price and selling price). So, In Margin valuation scheme, value of supply is margin derived on the supply on which we are liable to discharge tax.

Need of the scheme is to avoid double taxation on the goods which are already borne the incidence of tax.

Whether the margin scheme is mandatory for second hand goods dealer?

Margin scheme is not mandatory for the second hand goods dealer, at his option he can opt or not for margin scheme. And there is no requirement in the law that once if supplier selects for margin scheme in the financial year then he has to follow the scheme for entire year. Also, the second hand goods dealer can choose both margin scheme and transaction scheme for supply of used goods. For example, Mr. A had purchased two items Mobile phone and laptop (Used goods). Mr. A can choose margin scheme for supply of mobile phone and Transaction valuation mechanism for supply of Laptop.

Conditions to be satisfied to Avail Margin scheme.

1. The person dealing in Second hand goods shall be a registered person under the GST Act.

2. The registered person should not take credit Input tax credit on the goods procured by him for resale purpose.

3. The person should be engaged in supply of taxable goods.

4. The registered person should not process the goods in a such way that changes the nature of the goods.

Valuation of Second hand goods-Margin Scheme.

As per rule 32(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 Rule 32(5) specifies that a registered person who is enagaged in supply of second hand goods   makes any taxable supply then he has to pay the tax on the value between selling price and purchase price and if purchase price is more than selling price then value of supply is NIL.

Suppose if there is no margin in the supply then there is no need to pay any tax on such Supply. Here, there is one crucial point which needs to discussed. Suppose if Mr. A purchased three goods which as Mobile phone, Machinery, Laptop for Rs 5000/-, 300000/-, 10000/- respectively. Mr. A can sell the all three goods for Rs 7000/-, 250000/-, 15000/- respectively. Let us assume that all goods are qualified as second hand goods and now we will determine the value of supply for each good under rule 32(5).

• In case of Mobile phone, the profit is 2000/- [7000-5000] on which we are liable for tax under GST.
• In case of Machinery, the loss is 50000/- [250000-300000] on which we are not need to discharge any tax under GST.
• In case of Laptop, the profit is 5000/- [15000-10000] on which we are liable for tax under GST.

Now we can say that Mr. A has incurred a loss overall [2000-50000+5000= -43000] on which there is no need to pay tax under GST but under Margin scheme we have to calculate margin on each item. Mr. A has to pay tax on sale of each item if there is margin on the same irrespective of his overall profitability.

The Margin valuation scheme is applicable for only registered persons who are engaged in supply of Second hand goods. Let me ask one question here, whether the person who is facilitating the supply of second hand goods between two persons is eligible for margin scheme? The answer is No because these scheme is applicable for persons who are selling or purchasing the second hand goods but not for who are facilitating such sale or purchase for commission.

Here what constitutes second hand goods is provided in the Rule itself [32(5)] as purchase or sale of used goods as such or after minor processing which doesn’t change the nature of goods. In case, if nature of goods changes after processing then margin scheme is not applicable for such goods.

Costs Incurred for Minor processing:

If any costs incurred by the registered person for minor processing of used goods for resale purpose then that cost can be added to Value of Sale.

Example:

Suppose Mr. A who is second hand goods dealer purchased a Sewing machine from Mr. B for Rs 5000 and after some minor changes he made resale to Mr. C for Rs 7000. Now Mr. A is liable to pay tax on Rs 2000 (7000-5000).

Valuation in respect of Repossessed goods from Defaulting borrower.

If any registered person repossess any goods from a borrower for the non-payment of due amount then purchase price of that repossessed goods shall be calculated as follows.

Purchase price = Purchase value for default borrower -5% for every quarter or part thereof for the period b/w date of purchase of asset by defaulting borrower and date of its disposal.

Example: Suppose Mr. A who is second hand goods dealer provided the services of extending loans and advances to Mr. B on the security of goods. Mr. A repossessed the goods of the Mr. B because he failed to pay the due amount. Here the purchase price of the good for Resale purpose shall be calculated as follows.

Let’s take Cost of the good is 100000/-

Date of purchase= 01/01/2019

Date of possession of the good= 31/12/2019

Purchase price = 100000-5% (Jan -Mar) -5% (April-June) -5% (July-Sep) -5% (Sep-Dec)

=80000/-

Applicability of RCM if goods are purchased from unregistered person.

If any registered person who is engaged in supply of second hand goods purchases any goods from unregistered person then is not required to pay tax on RCM basis because the same is exempted vide notification no 10/2017-CT (R) dated 28/06/2017.

Applicable rates in Margin valuation scheme.

For all goods other than Motor vehicles, the tax rate which is applicable for first hand goods is applicable for Second hand goods also.

However for second hand motor vehicles tax rates are notified in Notification No.8/2018 CT(R) which are as follows.

• GST at the rate of 18% shall apply on petrol, LPG or CNG driven motor vehicles of engine capacity of 1200 cc or more and of length of 4000 mm or more
• GST at the rate of 18% shall apply on diesel driven motor vehicles of engine capacity of 1500 cc or more and of length of 4000 mm
• GST at the rate of 18% on Sports Utility Vehicles (SUV) & Utility Vehicles
• GST at the rate of 12% for any other category of motor vehicles which are not covered above.