Margin Scheme under Goods & Services Tax (GST)

From 1st July 2017, goods and services taxes were implemented in India. GST simplifies the tax system and its procedural aspects, which is one of its primary advantages. With the GST law, a variety of tax schemes have been established to simplify taxes. Margin schemes are among them. Let’s explore this tax scheme in detail. 

Margin Scheme

Taxation of goods that have already been taxed is avoided through the margin scheme in GST. The supplier or seller of goods can calculate the GST under Margin Scheme based on the difference between the value of the goods they supply and the value they receive from the customer.

GST is applicable on the real transfer price of the supply of goods under standard valuation norms. In the case of used goods, however, a person dealing in such goods might well be entitled to charge tax on the margin or difference. If there is no margin, no GST is due on the transaction. GST margin schemes operate on this premise.

Primary Objective of the Margin Scheme

The margin (the difference between the supply and purchase price) is the only tax that can be charged to persons dealing with USED GOODS to avoid double taxation.

The following example shows how a first-time buyer, Mr. Sharma, acquired a used/second hand car for * 3 Lacs (original price * 5 Lacs) and sold it for * 3.8 Lacs (with some small but important changes). As a result of the GST Margin Scheme, when selling the car, Mr. Sharma will be liable for the GST only on the Margin Value of 80,000. The inward transaction (purchasing) of 3 Lacs is entirely exempt from GST.

The margin is simply defined as the amount that would be added to the value of goods in case of repairs, refurbishments, or reconditioning. Furthermore, the seller will not issue a tax invoice to the purchaser if the buyer opts for a goods transaction. This results in no Input Tax Credit for the purchaser.

Taxes over taxes are eliminated under the Margin Scheme. The result is that the taxpayers will save more since only the difference in price will be subject to GST. As a result, paying excess taxes is completely eliminated.

Scheme for Availing Margins 

• Taxable supplies are required
• Second-hand goods must be supplied by the supplier
• Taxpayers who choose margin schemes are banned from claiming input tax credits
• Once an item is processed, it should not change its nature.

How to value the supply using the margin scheme

The valuation of the supply is the amount attained after subtracting the purchase price from the selling price. if the valuation of the supply is negative, it is to be overlooked as per Rule 32(5) of the CGST Rules, 2017.

When taxable supplies are made available by individuals dealing in second hand goods, used goods as such, or after marginal computation that does not significantly change their nature, and no input tax credit is accessible on the purchase of such goods, the difference between the selling and purchase prices must be accounted for.

Furthermore, if a credit or borrowings is to be salvaged from an unlicensed defaulting lender, the fair price of the item shall be the paid price of the products, lowered by five percentage points for each quarter or part thereof between the date the product was paid and the date it was sold, according to the provisions of section of the foregoing rule.

According to new Notification No.10/2017-Central Tax (Rate) New Delhi, issued on 28th June 2017, intra-State supplies of second hand goods to an unregistered supplier received by a registered person involved in the trading of second hand goods and who pays the amount of central tax deducted as per CGST Rules, 2017, will not be taxed under the CGST Act, 2017. SGST Acts contain similar exemptions as well.

Rate of taxation 

Under the marginal scheme, the rate of tax will be the same as that levied on unused goods. However, the Notification Number 08/2018-C.T.R. dated 25 January 2018 relates to motor vehicles where a concessional rate is applicable for payment of GST on the reduced value. Currently, used cars are subject to 12% and 18% GST. Vehicles under 4000 mm and vehicles over 4000 mm are charged 12% and 18% respectively.  

FADA, for example, is asking that all used vehicle margins be taxed at a uniform 5% rate.

Resolution of Issues 

• ITC on expenses : It only applies to goods that are not altered or only minimally processed (repaired/refurbished). Dealers who process goods that change their nature cannot choose a margin scheme. For margin calculations, the dealer must also take into account costs of repair, refurbishing, reconditioning, etc. In addition, second-hand and used-goods dealers face a convoluted issue.
• GST inclusion: The tax amount is not usually collected separately from the customers for used goods dealers, and therefore the department feels that tax will have to be paid on the margin amount. Another confounding issue here is whether GST payable on margins can be included in the sale price collected from the customers. During the erstwhile regime, courts confirmed that, in many cases, tax was construed as included in the sale price even when the tax had not been separately collected.

Conclusion

The purpose of taxes on goods and services is to prevent cascading effects. In the wake of GST, one of the most unclear topics was the tax implications associated with the sale of second-hand goods. Such items were already taxed when they were sold in the first place. By implementing the marginal scheme, the government intends to reduce the likelihood of double taxation on goods already subject to taxes.

Taxes are normally charged on the goods’ transaction value. The tax on margin may, however, still be applied to second hand goods dealers, i.e. the difference between the value of the goods supplied and the purchase price. GST will not be charged when there is no margin. By ensuring that the goods, after being subject to tax once, enter the supply chain a second time, the scheme is intended to avoid double taxation.