Margin Scheme in GST- All You Wanted to Know

Goods and Services Tax (GST) is an indirect tax that has been implemented in India from July 1, 2017. It has replaced various taxes like central excise, service tax, value-added tax (VAT), etc. Under GST, the input tax credit is allowed to be claimed only on goods and services used for business purposes. However, in certain cases, the government has allowed the margin scheme to be followed. This scheme is applicable when a registered dealer is selling second-hand goods.

What is the Margin Scheme in GST?

The margin scheme in GST is a scheme that allows a registered dealer to pay GST only on the profit earned on the sale of second-hand goods. Under this scheme, the GST is calculated on the margin earned on the sale of the goods, and not on the total sale price. The margin is the difference between the price at which the goods were purchased and the price at which they are sold.

This scheme is applicable only on the sale of second-hand goods, which means that the goods must have been used before. The scheme is not applicable on the sale of new goods. The margin scheme is applicable only to registered dealers who deal in second-hand goods and have opted for the scheme.

How does the Margin Scheme work?

The margin scheme works by allowing the registered dealer to pay GST only on the margin earned on the sale of second-hand goods. Let’s take an example to understand this better:

Mr. X purchases a second-hand car for Rs. 5,00,000. He spends Rs. 50,000 on repairs and maintenance of the car. He sells the car for Rs. 6,50,000. The margin earned on the sale of the car is Rs. 1,00,000 (Rs. 6,50,000 – Rs. 5,00,000 – Rs. 50,000). The GST applicable on the margin earned will be 18%, which comes to Rs. 18,000.

Under the regular GST regime, the GST applicable on the total sale price of the car would have been 18% of Rs. 6,50,000, which is Rs. 1,17,000. However, under the margin scheme, the GST payable is only Rs. 18,000.

When can the Margin Scheme be followed?

The margin scheme can be followed by registered dealers who deal in second-hand goods. However, there are certain conditions that must be fulfilled:

1. The goods must have been used before.

2. The dealer must have purchased the goods from an unregistered person or a person who is not eligible to claim input tax credit.

3. Must not have issued a tax invoice for the sale of the goods.

4. The dealer must maintain specific records of the goods sold under the margin scheme.

Advantages of the Margin Scheme

The margin scheme has various advantages:

1. Facilitates the sale of second-hand goods by reducing the GST liability of the dealer.

2. Simplifies the calculation of GST, as the tax is paid only on the margin earned and not on the total sale price.

3. Reduces the compliance burden on the dealer, as the records to be maintained are limited.

Disadvantages of the Margin Scheme

The margin scheme has certain disadvantages:

1. The margin scheme can be followed only by registered dealers who deal in second-hand goods.

2. Not applicable on the sale of new goods.

3. Can be complicated to calculate in some cases, as the value of the goods sold may not be easily ascertained.

Conclusion

The margin scheme in GST is a scheme that allows registered dealers to pay GST only on the margin earned on the sale of second-hand goods. The scheme is applicable only on the sale of second-hand goods, and not on the sale of new goods. The margin scheme simplifies the calculation of GST and reduces the compliance burden on the dealer. However, the scheme has certain disadvantages, like the fact that it is applicable only to registered dealers who deal in second-hand goods. Overall, the margin scheme is a useful scheme for registered dealers who deal in second-hand goods and can help them reduce their GST liability.