GST on Purchase and Sale of Second-hand goods Margin Scheme

GST on Purchase & Sale of Second-hand goods Margin: In our daily day-to-day life, we all either can sell our product which we bought years ago or purchase second-hand products purchased by their owner years before. When we are purchasing any product, we have to pay taxes on them like GST, and when we sell the goods, the buyer will have to pay the tax again for that same good; this is called double taxation.

Let’s understand with the help of an example:-

Suppose person A buys a car for rupees 8 lakhs, including the GST amount of 1.2 lakhs, and after five years, person A sold that car for Rs. 4 lakhs to person B then GST is imposed on such four lakhs rupees, it leads to the double taxation.

Therefore the Indian Government declares some rules for the purchase and sale of second-hand goods, and thus Margin scheme is made available.

There are two conditions:-

  1. There is no relation between the recipient and the related person.
  2. The only sole purpose for the consideration of the supplier is for the value of the products.

In the Marginal Scheme, there is some exception about above validation mechanism. The Marginal Scheme avoids the double taxation on the goods that are already borne the prevalence of tax.

Table of Content

What is a Margin Scheme?

It directly deals with the person who is involved in purchasing and selling second-hand goods. In the Margin scheme, the GST is paid related to the margin difference between second-hand goods’ purchase and sale price.

  • If you purchase second-hand goods from an unauthorised or unregistered dealer, you do not have to pay any GST for that second-hand product. This rule is established in Notification No. 10/2017 – Central Tax (Rate)). However, in standard cases, GST is payable if some reserve charges are affiliated with the product. These products sold, and GST is expected based on the difference between the sale and purchase amount.
  • The marginal Scheme is applicable only when there is no change or minor processing in the goods. If we change the nature of the second-hand goods, then this marginal scheme is not applicable for transactions and GST. If it causes any change in the nature of the product, then the GST will be applicable for the whole amount. Taking an example of it:
    • Suppose a jewellery shop owner purchase the gold ring and sold it to the customer with minor modification, like polishing etc. In that case, a marginal scheme will be applied to the product, but if the owner meets the gold ring and forms a necklace, then the GST is applicable for the whole amount, not for the marginal amount.
  • If we bought the second-hand products on negative as their sale price is low, then the marginal scheme will be ignored for the transaction. Again understanding with an example:-
    • If person A can sell a bike at Rs. 5000 profit and a second bike with Rs. 2000 loss, then person A has to pay the marginal tax only for the first bike and not for the second.
  • If we add some features to the purchased item like repair, refurbishing, reconditioning, etc., the same can also be added to the value of goods and be a part of the margin scheme.

What Is The Purchase Value If We Deal With The Defaulting Borrower And Repossession Your Money From The Defaulting Borrower?

If the defaulting borrowers captured your goods, then the purchase price (of second-hand goods dealer) will be calculated as the original purchase price of the good less than five percentage points for every quarter.

What is GST Rates Applicable for the Second-hand Product?

According to the GST law, there is no discrimination between new products and second-hand products. That means the GST Rates are identical for second-hand goods as if they were for the latest new goods.

If we give 28 % GST for a new car or a new car has 28 % GST Rates, then 28 % of GST Rates are applicable to the second-hand car sale. So there will be no difference in GST Rates for such new and used products.

Are Dealers Acting as an Agent?

Suppose a person is not related to purchasing and selling the products, but he acts as an agent between the buyer and seller. In that case, he or she ( the agent) needs to pay 18 % of the commission received from either the buyer’s side or the seller’s side as the GST. This 18 % is applicable under the GST law of 2017, that if a middle agent gets any commission during the deal between two parties, he or she has to pay 18 % GST from his commission.

What if we Purchase Second-hand Goods from the Registered Dealer?

If two registered dealers deal among them for a product, then the GST will be paid by the dealer who collects the selling item or the product. The dealer who sold the goods does not need to pay GST for their products. The GST produced by the purchasing dealer will count towards their Income Tax credit under the standard ITC Rule.

The marginal amount will be paid by the selling dealer, not the total amount as the GST.

There are still some points which you need to remember.

The person who is the sealer (sells second-hand goods) has to pay the GST only on his marginal tax. All the GST rates and the amount will be shown in the invoice of the GST payable. That is why the margin amount of the seller is determined by the purchase of goods; this is why no seller wants the purchaser to know the marginal for apparent reasons.

Is It Mandatory for Second-Hand Goods Purchasing?

You can choose for Marginal Scheme at your convenience; it is not necessary to opt for the Marginal scheme if you can opt for the marginal scheme once; that does not mean that you need to carry these scheme for the whole financial year. You can choose a Marginal scheme for any single good as per your needs.