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Published on:

December 28, 2024

Viraaj Vashishth

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Margin Scheme under GST

With the goods and services tax in place, doing business in India has been easier. A unique provision among them is the margin scheme under gst which renders some relief to the dealers who deal with the sale of second-hand goods. This article discusses the Margin Scheme under GST, how it operates, who qualifies for it, its advantages and its requirements.

As it was established in the year 2017, GST has made it hassle free for businesses to be tax compliant. The margin scheme however is aimed at dealers who engage in the selling of used goods and seeks to simplify the means of taxation. This scheme provides a means of avoiding the tax on tax effect, which is useful to businesses in used or old vehicles, machinery, and goods that are sold without input tax credit.

Understanding the Margin Scheme

The margin scheme under the GST applies to those traders that buy and sell second-hand articles without making a claim for input tax credit on the purchases in question. Under this scheme, gst is charged on the margin instead of the wholesale value of the goods, Where, the margin is defined as the sale price less the purchase price. This method allows businesses that trade in second hand goods or where ITC is not possible to lessen their tax liability.

What is the Margin Scheme for GST?

The margin scheme for GST allows dealers to pay GST on the difference between the sale price and the purchase price of goods. This margin is considered the taxable value for GST purposes, making the tax calculation more straightforward for dealers involved in the second-hand goods market.

Eligibility Criteria

In order to take advantage of the benefits of the Margin Scheme under GST, businesses have to comply with the following eligibility requirements:

Eligible businesses:

1. Persons engaged in the business of trading in second-hand goods.

2. Persons selling old or used products and articles, which may be vehicles, used equipment (machinery), equipment, and electronics.

3. Registration of Selling second hand goods: This margin scheme is very useful to the dealers of second hand goods because tax is levied only on the profit margin.

Exclusions:

1. Trading in new goods as their main occupation.

2. Not help claim the scheme registration for manufacturing and exporting as it will against the rules

3. Failing to maintain documents under the margin scheme.

Working Mechanism of the Margin Scheme

Under the scheme, GST is reclaimed on the margin instead of the full value of goods. The margin is the difference between the price of the purchased goods and the price at which the goods sold. Here’s an example:

How is the margin calculated?

For instance, there is a dealer who sold a second-hand item for 15,000Rs after purchasing it at 10,000Rs. This means the margin gained was 5,000Rs. So, the dealer claims GST on the margin earned not the sale amount.

“GST Payable = (Sale Price − Purchase Price) × GST Rate”

For example, if the GST rate is 18%, the GST payable would be:

GST Payable=(15,000−10,000)×18%=900

GST Rate under the Margin Scheme

Normally, the GST rate that applies to the goods sold is the same as the one prescribed for Margin Scheme. But there are cases when selling second-hand goods, say, would probably be at a lower GST than if one were selling new goods. With regard to second hand goods sold through margin schemes, the general approved margin rates are at 12% and 18% depending on the nature of the goods.

Type of Goods	GST Rate (Under Margin Scheme)
Second-hand Cars	12%
Used Electronics	18%
Used Machinery	18%

The rate of GST always takes effect on the Margin instead of the revenue earned ensuring that taxation is minimized.

An Illustrative Example

A second-hand dealer by the name of Mr. Arjun buys a pre-used sedan from an unregistered person, Mr. Raj, for Rs. 5,00,000. He paints the car after spending Rs. 20,000 and sells the car to Mr. Karan for Rs. 6,00,000.

With reference to the CGST Rules 2017 Margin Scheme, as outlined under Rule 32(5), GST is only levied on the margin, which in this case is:

Rs. 6,00,000 – (Rs 5,00,000 + Rs. 20,000) = Rs 80,000.

Using a GST rate of 12% for used cars as the assumption, the tax due amount is 80,000 x 12% which is the amount of Rs. 9,600. This arrangement enables ease of compliance and reduces the tax load as it is only the value addition made by the dealer which is taxed.

Benefits of the Margin Scheme

As for the businesses that deal with second hand goods, the Margin Scheme under GST provides a number of advantages:

1. Lesser Tax Liability: Given that the GST only applies to the Margin, the tax that businesses undertake is far lower than that of a business operating under a regular GST Scheme.

2. Elimination of Tax-on-Tax Repercussion: The scheme enables the payment of tax on only the margin so as to avoid tax-on-tax repercussions.

3. Easy Tax Computation: The margin scheme is quite convenient in calculating GST for small businesses dealing in second-hand goods simply because they do not have to go through the taxing issues of claiming ITC.

4. Promotion of Exchange in Second Hand Goods: Under the scheme second hand goods gain importance to trade which is needed for circular economy, waste reduction and enhanced sustainability.

Legal Responsibilities and Documentation

Businesses adopting the Margin Scheme under GST have to adhere to the following conditions pertaining to documentation and compliance:

1. Purchase Invoice: In case of buying second hand items, it is necessary to obtain a purchase invoice from the seller which states the applicable price of goods. On these margins, no ITC may be claimed under the margin scheme.

2. Sale Invoice: In such cases, the seller must also make out a sale invoice indicating the sale price and margin as part of the sale documents. In this regard, the customer is charged on the margin instead of the entire sale even though the full sale price was transacted.

3. Return Filing: Such dealers using margin schemes do have to file returns with respect to GST, such as GSTR-3B, GSTR-1 where they indicated taxable value (the margin) and GST to be paid.

Key Rule: Rule 32(5) of CGST Rules 2017

According to Rule 32(5) of CGST Rules 2017, the import of Margin scheme explains that in regard to second-hand goods, taxation is applied only on the profit margin and not on the overall selling price of the goods.. In this regard, businesses appreciated this arrangement since it makes the tax computations easy for them especially when dealing with second hand goods.

Conclusion

The Margin Scheme allows owners of second-hand goods dealers to enjoy the benefits of lower tax liabilities and at the same time uphold sustainable business practices. However, businesses have to keep all documents properly and meet the requirements specified in Rule 32(5) of CGST Rules 2017 to be able to avail of this scheme. In order for businesses to be able to use the Margin Scheme to its full potential, it is important that they have a proper understanding of how the margin is calculated, the applicable GST rates and the anti-avoidance measures needed.

FAQs

1. What is the Margin Scheme under GST?

The Margin Scheme enables business organisations that deal in second hand goods to pay tax only on the margin obtained from the sale of such goods such that only the sale price less the purchase price is taxed.

2. Who can opt for the Margin Scheme under GST?

For dealers that deal in second hand goods and items for which it is impermissible to claim input tax credit can opt for the Margin Scheme under GST.

3. Is GST applicable to second-hand goods under the Margin Scheme?

Yes, GST on second hand goods sold under the scheme is charged but only on the margin (being the amount left after deducting the buying price from the selling price).

4. What is Rule 32(5) of CGST Rules 2017?

According to Rule 32(5) of CGST Rules 2017 only the margin on the gain when selling second-hand goods is taxed under GST and not the entire selling price.

5. Is ITC applicable for acquisition made under the Margin Scheme in the GST regime?

No, Please note that no input tax credit will be allowed for the purchases made under the Margin Scheme under GST.

6. What is the method for calculating margins under GST on used articles?

The difference between the buying and selling prices is known as a margin, and in this case, GST applies only to the margin.

7. What is the amount of GST payable under the Margin Scheme for used articles?

On the used articles covered under the Margin Scheme 12% or 18% GST is paid depending on the type of goods.

8. Is it possible for GST to be used for new goods under the margin scheme?

No. The applicability of Margin Scheme depends only if the goods are second hand under the GST on second hand goods but not for new goods.

9. What should businesses do for compliance under the margin scheme?

They need to keep proper records of their purchase and sale of margin scheme items and also file GSTR-1 and GSTR-3B.

10. Are there restrictions of the margin scheme under the gst?

Yes there are. Businesses only have to comply with a certain set of documents and are not allowed to claim any ITC on purchases under the margin scheme.