Introduction

Generally, GST is payable on the transaction value which is the price paid or payable for the supply of goods and services when transaction takes place between un-related persons and price is the sole consideration for supply. However, a registered person may at his option, discharge tax on sale of used or second-hand goods on the margin amount which is the difference between selling price and purchase price of the goods. This scheme is popularly known as ‘margin scheme’ across the globe. The purpose of this scheme is to avoid double taxation as these goods (second-hand goods) have already borne the incidence of tax and re-enter in the economic supply chain.

Legal provisions

Section 15 of the Central Goods and Services Tax Act, 2017[1] (‘CGST Act’) and rules made thereunder is a complete code for valuation of supply of goods and services on which tax is payable.

As per Section 15(1) of the CGST Act, the value of supply of goods and services or both between unrelated persons shall be the transaction value, which is the price actually paid or payable for supply of goods or services or both when price is the sole consideration for the supply. Further, sub-section (2) and (3) of Section 15 provides for inclusion and exclusion of certain amount from the value of supply.

However, Section 15(5) of the CGST Act empowers the Government to notify the value of supply in respect of certain transactions, on the recommendation of GST Council, notwithstanding anything to the contrary contained in Section 15(1) and (4) of the CGST Act.

In the exercise of this power, the Government has enacted Rule 32(5) of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) which provides that value of supply in case of second-hand goods shall be the margin amount where no input tax credit has been availed on the purchase of such goods.

Further, in the exercise of power conferred 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 difference between the selling price and depreciated value 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 selling price and purchase price.

Analysis of the above provision

As per Section 15(5) of the CGST Act read with Rule 32(5) of the CGST Rules, in case of sale of second-hand goods, tax is payable on the margin amount instead of transaction value which is paid or payable for sale of goods. However, applicability of Rule 32(5) of the CGST Rules for arriving at the value of supply is subject to fulfilment of following conditions:

1. The supply must be a taxable supply;
2. The supplier shall be 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
3. where no input tax credit has been availed on the purchase of such goods.

Accordingly, subject to fulfilment of aforesaid conditions, a registered person may opt for margin scheme for payment of GST. Here, it is interesting to note that margin scheme is only a special valuation provision to arrive at the value of supply of second-hand goods for the purpose of payment of tax, and the rate of tax will be same as leviable on un-used goods except in case of motor-vehicles for which Notification Number 8/2018-C.T.R. has been issued for payment of GST at a concessional rate on reduced value (i.e. margin amount).

Whether margin scheme is optional or mandatory?

A doubt may arise whether opting of margin scheme is optional or mandatory for the registered persons dealing in purchase and sale of second-hand goods. In this regard, Rule 32(1) of the CGST Rules clearly provides that value of supply in respect of specified supplies shall at the option of the supplier will be determined in the manner provided in Rule 32 of the CGST Rules. Hence, it can be understood that margin scheme is optional for the taxpayer. Further, the taxpayer opting for margin scheme is barred from availing input tax credit, if any paid on the subject goods being sold under the margin scheme. Accordingly, a taxpayer has option to pay tax on margin amount without availing input tax credit on the subject second-hand goods or pay tax on the transaction value and avail input tax credit.

Reference can be made to the Ruling issued in 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 subject goods.

Whether margin amount must be considered qua each transaction or the supplier can compute margin in respect of all transactions executed during a tax period?

Another doubt which may arise whether margin must be computed in respect of each transaction of sale of second-hand goods or it must be considered qua all the transactions executed during a tax period.

In this regard, it may be noted that under GST, tax is payable on each transaction of supply of goods and services. Further, Rule 32(5) of the CGST Rules also provides that the value of supply of second-hand goods shall be the difference between selling price and purchase price. Accordingly, it can be understood that margin amount must be considered qua each transaction of supply of second-hand goods and not qua the transactions executed in a tax period.

Whether margin amount can be inclusive of GST?

This is a common issue faced by the persons dealing in second-hand goods as they generally do not collect tax amount separately from the customers. Hence, the issue arises whether sale price collected from the customers can be construed to be inclusive of GST payable on the margin amount; and taxable amount and tax can be calculated by way of reverse calculation in the absence of specific provision.

The aforesaid issue was raised in Deccan Wheels reported in 2021 VIL 393 AAR, before the Maharashtra Authority of Advance Ruling. However, this question was subsequently withdrawn by the Applicant before the issuance of Ruling, but the concerned officer opined that tax will be payable over and above the margin amount. Hence, it can be construed that department is of the view that tax will be payable over and above the margin amount.

It is pertinent to note that the Courts in a plethora of judgements, in the erstwhile regime, have held that sale price will be deemed to be inclusive of tax if such tax is not separately collected. However, applicability of this principle is yet to be tested in the court of law in the context of margin scheme where margin amount has been deemed to be the value of supply of second-hand goods. Here, it may be noted that there is a specific provision under UK VAT laws and EU VAT Directive that margin amount will be deemed to be inclusive of tax. However, there is no such specific provision under Indian GST laws.

Considering the ambiguity in the industry, it is highly desirable that CBIC issues circular to clarify the above issue.

Whether input tax credit can be availed by person dealing in sale of second-hand goods?

This is another common issue which is faced by the persons dealing in second-hand goods. Here, it may be noted that the Authority in the case of Deccan Wheels (Supra) has held that the Applicant dealing in second-hand motor vehicle will not be eligible to take ITC of any expenses incurred during the course of business. However, the Authority has not given any specific reasoning for reaching at the conclusion. This Ruling is likely to cause confusion in the industry as they generally avail ITC of GST paid on other expenses barring the subject goods. In such a case, CBIC may clarify eligibility of ITC on such expenses.

Conclusion

This scheme enables the taxpayers to pay tax on the margin amount instead of transaction value leading to lower amount of tax on sale of second-hand goods. However, the open issues need to be addressed by the CBIC to bring certainty and uniformity in the industry.

[The authors are Senior Associate and Joint Partner, respectively, in the GST Advisory team in Lakshmikumaran & Sridharan, Gurugram]

[1] Similar provision exists in IGST Act, SGST Act and UTGST Act.