GST on Second Hand Goods

The transaction value holds significant importance under the Goods and Services Tax (GST) regime as the GST is imposed based on the transaction value. The provisions pertaining to transaction values are contained in section 15 of the CGST Act 2017. However, in the case of second-hand goods, where the goods have been previously taxed, are reintroduced into the supply chain, since the GST has already been levied on the transaction value by the supplier during the initial supply. Hence in order to prevent double taxation on supply of second hand goods a Margin Scheme was introduced. In this article we are going to discuss in detail about such Margin Scheme which is applicable in case of the supply of second hand goods.

For determining the transaction value in case of supply of second hand goods the provisions are contained in sub rule 5 of rule 32 of CGST Rules 2017. The said rule 32(5) states that;

“(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:

Provided that the purchase value of goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by five percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession”.

From the above it is clear that in case of supply of second hand goods on which ITC was not claimed earlier, the value of supply shall be the margin i.e., the difference between sale price & purchase price and where the purchase price is more than the sale price i.e., the margin is negative than in such case the said value shall be ignored. For example Mr. A is a dealer of goods, registered under GST. It purchased some goods for Rs. 1,50,000/- and sold it to buyer for Rs. 2,12,000/-. The Margin will be Rs. 62,000/- (Rs. 2,12,000- Rs. 1,50,000) being the difference between sale price and purchase price and applicable GST rate would be charged on margin of Rs. 62,000. However if the above goods are sold for Rs. 1,20,000/-. In such situation the margin would become negative i.e.,(30,000) hence such value shall be ignored and no GST would be chargeable in such case.

For the purpose of taxability of second hand goods under GST, these goods should be bifurcated as (a) Motor Vehicle including car, trucks, vehicles used to transportation of goods and other passenger vehicles. (b) Other than Motor Vehicles. Such bifurcation is necessary since the different rates of GST are notified in respect of second hand Motor Vehicles and in case of other goods.

All rates of GST for supply of goods are notified under the Notification No. 01/2017-Central Tax (Rate) dated 28.06.2017. In general, the rate of GST on sale of motor vehicles is 28%. However, Notification No. 08/2018-Central Tax (Rate) dated 25.01.2018 provides some concessional rates of GST, in respect of old and used vehicles. The rates specified in the notification no. 08/2018 CT(R) are as follows;

Explanation -For the purposes of this notification,
(i) in case of a registered person who has claimed depreciation under section 32 of the Income Tax Act,1961 on the said goods, the value that represents the margin of the supplier shall be the difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply, and where the margin of such supply is negative, it shall be ignored; and

(ii) in any other case, the value that represents the margin of supplier shall be, the difference between the selling price and the purchase price and where such margin is negative, it shall be ignored.

2. This notification shall not apply, if the supplier of such goods has availed input tax credit as defined in clause (63) of section 2 of the Central Goods and Services Tax Act, 2017, CENVAT as defined in CENVAT Credit Rules, 2004 or the input tax credit of Value Added Tax or any other taxes paid, on such goods”.

Accordingly, in case a motor vehicle is sold by a registered person who has claimed depreciation u/s 32 of the Income Tax Act. The margin for the purpose of GST computation shall be the Selling price of Motor Vehicle less written down value of the motor vehicle on the date of sale as per Income Tax act. If the margin is positive then GST would be charged as per applicable rate given under Notification No. 08/2018 CT(R). However, if the margin is negative then it shall be ignored and no GST would be leviable in such situation.

Till now, we have made detailed discussion about the sale of old & used vehicle and applicable rate of GST on supply of old motor vehicles. Now, the question comes what GST rate would be applicable for supply of second hand goods other than motor vehicles?  In this regard it is important to know that for determining the applicable GST on sale of second hand goods other than motor vehicles, no distinction would be made between the sale of second hand goods and new goods.  Meaning thereby the applicable rate of GST on sale of new goods would also apply for sale of second hand goods also. For example if any new article is sold at the rate of 28%, then the re-sale of such used article will also be subject to 28% tax under margin scheme. The only exception is in the case of motor vehicles as discussed above.

In respect of sale of second hand goods, some times a question came that whether RCM would be applicable in case the second hand goods are purchase by the registered person from unregistered person? In this regard a Notification No. 10/2017 CT(R) dated 28.06.2017 was issued by the CBIC in which an exemption was provided in respect of intra-state supplies of second hand goods received by a registered person from any supplier, who is not registered, from the whole of the central tax leviable thereon under sub-section (4) of section 9 of the Central Good and Services Tax Act, 2017. Hence RCM would not applicable in this case.

Further doubts have been arised regarding the applicability of the margin scheme under GST for dealer deals in old and used empty bottles. In this regard the CBIC has issued a press release on dated 15.07.2017, wherein it was stated that the margin scheme can be availed of by any registered person dealing in buying and selling of second hand goods (including old and used empty bottles) and who satisfies the conditions as laid down in rule 32(5) of the Central Goods and Services Tax Rules, 2017.

Conclusion:  In case of supply of second hand goods the GST would be leviable on the margin i.e., the difference between sale price & purchase price. However if such difference is negative then such value shall be ignored and no GST would be leviable in such situation.

Disclaimer:  The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.