Margin scheme under G.S.T

Shreya Patel

12 Oct, 2023

G.S.T. is levied on the transaction value, which refers to the price that is paid or due for goods and services. However, under this scheme, the G.S.T. is computed on the profit margin, which is the distinction between the value at which the items are supplied and the cost at which they are purchased. As the goods, which previously bore the incidence of tax, reenter the supply and economy supply chain, the scheme’s goal is to prevent double taxation. Where the individual is a second-hand goods trader, Rule 32(5) of the C.G.S.T. Rules, 2017, specifies the procedure for the scope of supply and the value of G.S.T. The government implemented G.S.T. to prevent the cascading effect. One of the most perplexing concerns following the implementation of G.S.T. was the “Tax consequence on sale of used or second-hand goods.” Because the tax has already been applied to these used products.

The G.S.T. Margin Scheme is a unique scheme that enables registered taxpayers who sell used items to pay tax just on the value added or the margin of profit made on those sales, as opposed to taxing the total sale price.

What do you mean by second-hand goods?

Second-hand goods are the goods that have already been used once and are being re-used by others again. For example, many shops sell second-hand good quality clothes and shoes or sell second-hand cars and other transport devices, electronic appliances, etc.

What is the margin scheme in G.S.T.?

The margin scheme is the difference between the purchasing price and the selling price of used items. Only this margin will be subject to G.S.T. charges, not the total selling price. The margin scheme primarily applies to second-hand goods. The C.G.S.T. Rules, 2017¹, Sub-rule (5), have been updated by Notification No. 10/2017-Central Tax. This sub-rule addresses the valuation of used commodities, especially used cars.

Only when there is no alteration, or only minimal processing (repairing/refurbishing) of the goods is the margin scheme applicable. The dealer cannot choose the “Margin Scheme” if the processing alters the character of the goods. For example, a jeweller cannot choose the “Margin Scheme” if, for instance, they buy a gold band from an unregistered seller and turn it into a chain of gold before selling it.

Valuation of G.S.T. under the margin scheme

Only those who engage in purchasing and selling second-hand goods are subject to the valuation rules outlined in Rule 32(5). It is applicable when such a dealer supplies taxable products only. It indicates that the supply of exempt goods has no bearing on the aforementioned sub-rule. This sub-rules prerequisite is that the seller must not use an input tax credit when buying second-hand or used products. A second-hand goods dealer who purchases such second-hand items from an unregistered source is not required to pay C.G.S.T., according to a notification dated June 28, 2017 (Notification No. 10/2017). On intra-state supplies, the exemption is applied to the full amount of C.G.S.T. that would otherwise be due. Under the I.G.S.T. Act, an equivalent notification is published.

What is the purpose of having a margin scheme?

As these are second-hand or used items that have already incurred the final tax burden and are reentering the supply chain, the scheme’s goal is to prevent double taxation.

Conditions of the margin scheme

• The supplier has to deal in second-hand goods only to avail of this scheme.
• The dealers can only avail of the benefits of the margins scheme when they have not chosen the composition scheme.
• The supplier has to be registered under goods and service tax to be able to avail of the margin scheme.
• All the transactions that take place should be taxable supply only.
• The input tax credit must not have been claimed on the goods when purchased.
• All the records of the transactions have to be maintained

Is the marginal scheme mandatory or optional?

Rule 32(1) of the C.G.S.T. Rules makes it abundantly clear that the value of the supply in relation to the specified supplies shall, at the supplier’s discretion, be determined in accordance with Rule 32 of the C.G.S.T. Rules. Therefore, it is clear that the taxpayer has an option about the margin scheme. Additionally, the taxpayer who chooses the margin scheme is not permitted to claim any input tax credits that may have been paid on the relevant products sold under the margin plan.

Therefore, a taxpayer has the choice of paying tax on the transaction value and claiming an input tax credit or paying tax on the margin amount and claiming an input tax credit for the relevant used items. You can refer to the Authority’s ruling in the Attica Gold Private Limited application, 2020 (36) G.S.T.L. 445, which stated that the applicant cannot choose the margin scheme if the subject items have already received an input tax credit.

Benefits of the margin scheme

Following are the benefits of the margin scheme under G.S.T.

1. Lower Tax Responsibility: The Margin Scheme reduces the tax responsibility on the selling of second-hand goods. Simply, the disparity between the sale and purchase price of the products is taxed, which is far lower than the standard G.S.T. rate.
2. Higher Profit Cushion: Because the tax liability is smaller, the Margin Scheme allows the dealer to make greater margins of profit on the sale of second-hand goods.
3. Enhanced Compliances: The Margin Scheme gets rid of the obligation for dealers to keep precise records of input tax credits, reducing the compliance load and simplifying the process.
4. Support for the Second-hand Goods Market: The Margin Scheme supports the second-hand goods industry by rendering it easier to get to consumers because there is less tax owed on these items.
5. Promotes the formalization of the Second-hand Goods Sector: The Margin Scheme promotes the regulated nature of the second-hand goods market because it eases the burden of compliance and offers an easy-to-understand tax structure, making it more appealing for dealers to conduct business legally and openly.

Conclusion

The G.S.T. is applied to the difference in the price of the goods supplied and their cost of purchase. To prevent double taxation as previously taxable items enter the chain of supply once more, G.S.T. is only assessed on the marginal amount. The taxpayer is not required to use the margin scheme. Additionally, if the taxpayer chooses the margin scheme, they are prohibited from claiming any input tax credits that may have been received on the goods that they are selling pursuant to the margin scheme.

1. https://cbic-gst.gov.in/pdf/01062021-CGST-Rules-2017-Part-A-Rules.pdf