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GST was introduced to simplify the Indian Indirect taxation system as a single unified tax. Within the GST regime, various schemes were launched to make taxation easier. Margin scheme is one of these. This guide will help you understand the margin scheme in detail.
GST is generally levied on the transaction value of the goods and is applicable to second-hand goods. In such cases, GST is charged on the difference between the purchase price of goods and the value of the supply of goods. Levying GST on marginal amounts helps avoid double taxation as the goods that have been previously taxed enter the supply chain again.
The margin scheme under GST applies to registered taxpayers engaged in buying and selling second-hand or used goods, specifically when purchasing from unregistered persons.
Rule 32(5) of the CGST Rules, 2017, defines the scope of supply and GST valuation for second-hand goods dealers. The value of supply is calculated as the difference between the purchase and selling price. If this difference is negative, it is ignored.
To qualify as second-hand goods, the following conditions must be met:
As per Notification No. 10/2017, issued on 28th June 2017, second-hand goods dealers are exempt from paying CGST when purchasing such goods from unregistered suppliers. This exemption applies to intra-state supplies and covers the full CGST liability.
Given below are the conditions that you need to fulfill to avail of the margin scheme under GST -
M/s Vinayak Enterprises Ltd is a dealer in second-hand vehicles. They purchase a second-hand Maestro (original price – Rs.80,000) for Rs.40,000 from an unregistered person. They sell the same vehicle for Rs.50,000 after minor refurbishing work. The supply of the two-wheeler to the company for Rs.40,000 is exempted. However, the sale transaction of Rs.50,000 with the customer is liable for GST. For GST, the value will amount to Rs.10,000 (difference between Rs.50,000 and Rs.40,000). Since the margin scheme is being opted for, the company cannot claim any input tax credit.
| Description of Goods | GST Rates |
|---|---|
| Old and used CNG and LPG motor vehicles with engine capacity of 1200 CC or more and length of 4000 mm or more. | 18% |
| Old and used diesel vehicles with engine capacity 1500 CC or more and length 4000 mm or more. | 18% |
| Old and used sport utility vehicles (SUVs) with engine capacity of 1500 cc and more. | 18% |
| All old and used vehicles except the above three categories | 12% |
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GST is typically levied on the transaction value of goods. However, under the margin scheme, which applies mainly to second-hand goods, GST is charged only on the difference between the selling price and the purchase price.
Profit Margin Percentage Formula:
Profit Margin Percentage = Net Profit/Revenue*100
Net Profit = Total Revenue – Total Expenses (including cost of goods sold, operating expenses, taxes, etc.)
Revenue = Total income generated from sales or other operations.
GST is calculated on the selling price of goods or services, which includes the profit margin. The payable GST is determined by multiplying the taxable value of the supply by the applicable GST rate. Therefore, GST applies to the total sales value, inclusive of the profit margin.
If the selling price is lower than the purchase price, the negative value is ignored. This valuation rule applies to individuals or businesses purchasing second-hand goods after paying tax to the supplier, provided they do not claim input tax credit (ITC) on the purchase.
According to Rule 32(5) of the CGST Rules, 2017, if a person engaged in buying and selling second-hand goods supplies taxable goods—either in their original state or after minor processing that does not change their nature—and has not claimed input tax credit (ITC) on the purchase, the value of supply is determined as the difference between the selling price and the purchase price. If this difference is negative, it is ignored.
