The Goods and Services Tax (GST) was introduced in India to create a unified and centralized taxation system for goods and services. Among the various schemes introduced under the GST framework, the margin scheme is specifically designed to address the taxation of second-hand goods. This scheme ensures that GST is levied only on the profit margin, thereby preventing the occurrence of double taxation.
Meaning of the Margin Scheme
Under normal circumstances, GST is levied on the transaction value of goods. However, the margin scheme applies to the sale of second-hand goods and calculates GST differently. Instead of taxing the full value of the transaction, GST is levied only on the difference between the selling price and the purchase price of the goods. This ensures that goods, which have already been taxed during their initial sale, do not face redundant taxation when re-entering the supply chain as second-hand items.
Scope of Supply and Valuation Under the Margin Scheme
The mechanism for determining the scope of supply and valuation under the margin scheme is outlined in Rule 32(5) of the CGST Rules, 2017. According to this rule, the taxable value for GST is computed as the difference between the purchase price and the selling price of the second-hand goods. In cases where the calculated value is negative, it is disregarded, and no GST is levied.
For goods to be classified as second-hand under the margin scheme, the following criteria must be met:
- The goods must be used or must have undergone minor processing without altering their original nature.
- The input tax credit (ITC) must not have been availed on these goods.
Additionally, a notification issued on 28th June 2017 (Notification No.10/2017) exempts second-hand goods dealers from paying Central GST (CGST) on purchases from unregistered suppliers. This exemption applies to intra-state supplies, covering the full CGST amount payable in such cases. A corresponding notification is also in effect under the IGST Act.
Conditions for Availing the Margin Scheme
To be eligible for the margin scheme, second-hand goods dealers must comply with specific conditions:
- The supplier of goods must operate as a second-hand goods dealer.
- Dealers opting for the margin scheme cannot claim input tax credit on such goods.
- Any processing carried out on the goods must not alter their original nature.
- The transaction must qualify as a taxable supply under GST.
Illustrative Example
Consider the case of M/s Zenit Enterprises Ltd, a dealer in second-hand two-wheelers. The company purchases a used Honda Activa, originally priced at Rs. 77,000, for Rs. 42,000 from an unregistered individual. After conducting minor refurbishing, the vehicle is sold for Rs. 55,000.
As per the notification dated 28th June 2017, the purchase of the vehicle for Rs. 42,000 is exempt from CGST. However, GST is applicable to the profit margin—the difference between the selling price (Rs. 55,000) and the purchase price (Rs. 42,000). Thus, GST is calculated on the margin of Rs. 13,000. Since the margin scheme is adopted, the company cannot claim input tax credit for the refurbishing expenses.
Conclusion
The margin scheme under GST provides a streamlined approach to taxing second-hand goods, ensuring that double taxation is avoided. By taxing only the profit margin, this scheme supports second-hand goods dealers while maintaining compliance with GST regulations. Dealers must adhere to specific conditions, such as not claiming input tax credit and ensuring that the goods’ nature remains unchanged, to benefit from this scheme. With these provisions, the margin scheme stands as a crucial element of GST, facilitating fair taxation and reducing financial burdens on second-hand goods transactions.
Leave a Reply
You must be logged in to post a comment.