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Margin scheme under GST

Updated on :  

08 min read.

GST was introduced to have a unified and centralised taxation system on goods and services. Various schemes have been introduced under the GST regime, the margin scheme being one of them.

Meaning of margin scheme

In general, GST is always levied on the transaction value of the goods. The margin scheme is mainly applicable to second-hand goods. Here, the GST is charged on the difference between the value of the supply of the goods and the purchase price of the goods. GST is levied only on the marginal amount to avoid double taxation as the goods that have been previously taxed enter the supply chain once again.

Scope of supply and valuation for GST under the margin scheme

Rule 32(5) of the CGST Rules, 2017 provides the mechanism for the scope of supply and value of GST where the person is a second-hand goods dealer. The value of supply will be calculated as the difference between the purchase price of the goods and the selling price of the goods, and where the value of supply is negative, it shall be ignored.

For goods to qualify as second-hand goods, the following conditions shall be met-

  • The goods are used goods or goods that have undergone minor processing where the processing has not resulted in any change with regard to the nature of the goods.
  • Input tax credit has not been availed on these goods.

A notification dated 28th June 2017 (Notification No.10/2017) exempts a second-hand goods dealer from paying CGST upon buying such second-hand goods from an unregistered supplier. The exemption is levied on intra-state supplies with regard to the entire amount of CGST payable in that case. A similar notification is issued under the IGST Act.

Conditions to be fulfilled to avail margin scheme

  • Supplier of goods must be a second-hand goods dealer.
  • Opting for a margin scheme means the taxpayer cannot avail input tax credit.
  • If the goods undergo any further processing, the nature of the goods shall not change.
  • A transaction must be a taxable supply.

Illustrative example

M/s Zenit Enterprises Ltd is a dealer in second-hand two-wheelers. They purchase a second-hand Honda Activa (original price – Rs.77,000) for Rs.42,000 from an unregistered person. They sell the same vehicle for Rs.55,000 after minor refurbishing work. As per the 28th June 2017 notification, the supply of the two-wheeler to the company for Rs.42,000 is exempted. However, GST will be levied on the sale transaction of Rs.55,000 with the customer. For GST, the value will amount to Rs.7,000 (difference between Rs.55,000 and Rs.42,000). Since the margin scheme is being opted for, the company cannot claim any input tax credit.