INTRODUCTION
The Indian economy has undergone a massive change in consumer behavior in recent years, none so evident than in the increasing popularity of the second-hand goods market. Refurbished smartphones, pre-owned cars, secondhand luxury: Their appeal is swelling across both urban and rural landscapes. Driven by rising costs, eco-consciousness, and the emergence of re-commerce platforms, the second-hand marketplace has formalized into a structured, monetized sector serving both price-sensitive shoppers and eco-aware consumers. (GST on second-hand goods)
The landscape of indirect taxation, with GST at the forefront, becomes essential in this vibrant marketplace. Though GST purports to provide a simpler tax regime with few complexities across the board of transactions, the taxation of used goods creates a number of complicated queries. Should goods that were already taxed when first sold be subject to tax again? What is the treatment of GST on the transactions made by unregistered persons to registered dealers? Does the tax law differentiate between new and used goods?
To resolve this complexity, the Goods and Service Tax (GST) compliance and framework have certain measures and practices logged, such as the Margin Scheme under Rule 32(5) in the GST Act, exemptions on intra-state purchases from unregistered sellers and other customary industry standards. But it’s far from easy in the reality of implementation. Ambiguity around the processes for determining valuation, documentation, and compliance remain as pain points for second-hand goods dealers, especially in many of the informal and semi-formal segments of the economy.
This article delves into the regime of GST on second-hand goods — covering the statutory provisions, margin scheme mechanics, interpretation and application by sectors, exemptions, compliance aspects, and relevant case laws. Through a lens of conciseness and relevance, this article aims to decode the impact of GST on the sale of second-hand goods, and whether the law finds the equitable balance between revenue interest and business facilitation.
STATUTORY FRAMEWORK (GST on Second-Hand Goods)
GST on Second-Hand Goods
The substantive provision enabling the applicability of GST to the inter-state supply of goods or services is section 7(1) of the CGST Act, which defines “supply” to mean any form of transaction, such as sale, exchange, transfer, lease, or the like, undertaken for consideration, in the course or furtherance of business. Consequently, assuming that a registered dealer is in the business of buying and selling, a resale of used goods shall be treated as a taxable supply.
Significantly, “goods” are defined broadly under section 2(52) of the CGST Act to mean any kind of movable property (other than money and securities) and there is no distinction made here between new and used goods. As a result, the GST law treats second hand goods (unless specifically exempted) just like new goods. Furthermore, Article 366(12) of the Constitution of India defines ”goods” as all materials, commodities and articles. There’s no exception for used or already taxed items. So the second-hand goods fall under its classification beyond doubt and accordingly, sale of second-hand goods attracts import of goods tax when sold under conditions prescribed.
Reverse Charge on purchases from unregistered supplier
Also, an important provision relating to second-hand goods is Section 9(4) of the CGST Act (RCM provisions). It gives that in case of a purchase of goods by a registered person from unregistered person, the tax has to be borne by the recipient (registered purchaser) and not supplier.
However, the second-hand goods industry is also helped by another exemption, given under Notification No. 10/2017 – Central Tax (Rate), dated 28th June 2017:
If the registered person dealing with buying and selling of second-hand goods makes any Intra-State Purchase by Unregistered Person: Such Supplies Will Be Exempt from Exercise of Reverse Charge under Section 9(4)
This exception allows second-hand dealers to source from individuals and unregistered sources (i.e., consumers) without facing RCM liability, as long as the supply is executed intra-state.
But note that this exemption is not applicable to inter-state transactions. Under reverse charge mechanism, payment of Integrated GST (IGST) is required to be made by the buyer when purchase of used goods is made from unregistered supplier located in different state. Of course the dealer may claim input tax credit (ITC) if eligible.
Taxable Person & Scope of Business
To attract GST on a transaction involving second-hand goods, the supplier needs to be a taxable person making the supply in the course or furtherance of business. This distinction is important as it helps us get not to tax casual or personal disposals.
As an example, when an individual sells an old mobile phone or private item to a registered second-hand dealer, that does not provide a supply from the seller’s side, as it’s not part of any business they may conduct. GST would be applicable only when the dealer will be reselling that item in the course of furtherance of the business activity.
Valuation & Rule 32(5)-A Special Provision
GST law, acknowledging the distinct characteristics of second-hand goods, introduces a specialized valuation mechanism through Rule 32(5) of the CGST Rules, 2017, an approach commonly referred to as the Margin Scheme. This provision exempts the sale from GST on the entire sale price and instead, GST is only applicable on the margin (the difference between the purchase price and the sale price), subject to certain conditions. Which is the topic of the next section. (GST on second-hand goods)
Tax Invoice Requirements
In Margin Scheme, dealer is not required to issue tax invoice and the buyer cannot claim ITC on such purchases. However, where the sale is not under the margin scheme (input tax credit has been availed or goods are substantially amended), a proper tax invoice is required to be issued as per Rule 46 of the CGST Rules. (GST on second-hand goods)
MARGIN SCHEME UNDER RULE 32(5)
One of the most practical and business-friendly provisions available for the transactions in the sales of second-hand goods, under the framework of GST, is a Margin Scheme provided under Rule 32(5) of the CGST Rules, 2017. Only the profit margin flows through the hands of the dealer so this special valuation mechanism doesn’t allow tax on the entire resale value of used goods. This is intended to avoid double taxation with respect to the same goods, and to facilitate compliance for enterprises that are in charge of reselling previously subject to tax goods. (GST on second-hand goods)
- What the Rule States
Rule 32(5) of the CGST Rules states:
“In case of a taxable supply made by a person in the course of buying and selling of second-hand goods i.e., used goods as-is or after minor processing that does not alter the nature of the goods when no credit of input tax has been claimed on the acquisition of such goods, the value of the supply shall be the difference between the selling price and the purchase price. “If the value is negative, it shall be ignored.”
This means:
- GST is required to be paid only on the margin (profit) earned.
- In case of no profit or if the dealer sells at any loss, no GST is chargeable.
- The Scheme is applicable when no ITC is claimed on purchase.
- Conditions Under Which The Margin Scheme Can Be Availed
Rule 32(5) does not confer this benefit automatically. The dealer has to fulfill the following conditions:
- Dealer shall be engaged in the business of trading in second sale goods. This does not include occasional sellers or casual disposals of assets.
- Goods must be utilized before sale. For used goods, it should have been used before, and just being called ”pre-owned,” without any actual use, may not qualify.
- Has not undergone significant processing or manufacturing. Lifetime warranties cover only minor repairs, refurbishing, re-packaging or cosmetic changes. Change in form that alters the nature of the product will void the transaction.
- ITC cannot be claimed on purchase. The margin scheme cannot be applied if the dealer has taken ITC at the time of purchase (from a registered dealer), in such cases GST is required to be levied on the entire selling price.
- Loss can’t be adjusted or carried forward. Any purchase price greater than the selling price (i.e. negative margin) is simply ignored for tax purposes and cannot offset future profits.
- Exceptions for Margin Scheme
The scheme will not apply in cases where:
- ITC has been availed by the dealer on such purchase.
- The transformed goods shifting their character and purpose.
- They serve as links or brokers between transactions for goods they do not own.
- The sale is one of a composite or mixed supply with bundled services.
- Sale of used goods by a non-merchant or an end-user (not in course of business).
In such cases, the usual valuation and invoicing rules apply and GST is levied on the full sale value.
- A dealer who has opted for the Margin Scheme is not obliged to issue a tax invoice. In such case instead of issuing a tax invoice, a bill of supply can be issued, buyer cannot claim ITC. The aim of this provision is to avoid situations where tax credit can be claimed on cascading processes even though there was never a GST paid on purchase to start with. (GST on second-hand goods)
GST RATES AND SECTOR-WISE ANALYSIS OF SECOND-HAND GOODS
Second-hand Vehicles
A variety of pre-owned vehicles are traded in the Indian market—cars, two-wheelers, commercial vehicles. When it was first implemented, GST would be charged at the same high rates that apply to new vehicles, which meant heavy expenses for second-hand dealers and consumers alike.
In context of same the Government issued Notification No. 8/2018 – Central Tax (Rate) dated 25th January 2018 wherein it has been reduced GST rates on used motor vehicles subject to certain conditions.
Revised GST Rates on Sale of Used Vehicles (Subject to Non-availment of ITC and Selling by Registered Dealer)
- 12% GST On Used Vehicle Having >1500cc Engine Capacity Or >4000mm length.
- 18% GST on used vehicles other than passenger vehicles.
- No GST in Some Cases where vehicles Sold by Individuals (Non-dealers) not in the course of Business.
Margin Scheme Applicability:
If input tax credit was not availed on the purchase, GST is paid only on the margin (i.e., sale price – purchase price).
Margin on depreciated value: For defaulting borrowers whose vehicles are repossessed, these vehicles are valued based on depreciated value (i.e. as provided in income tax rates).
Example: A second-hand car bought at ₹3,00,000 is sold at ₹3,50,000. If the Margin Scheme is applicable, the GST is payable only on ₹50,000.
Exemptions under GST on Used Goods
Though GST appears to cover a wide range of second-hand goods, it has its exemptions for a casual seller, dealers in unorganized sector, etc. A major exemption in this regard is provided by Notification No. 10/2017 – Central Tax (Rate), which gives an exemption from tax on intra-state purchases of second-hand goods made from unregistered persons by registered dealers who are in the business of purchase and sale of used goods. This exempts dealers from paying GST on reverse charge basis thereby promoting trade in unorganized/ informal markets without compliance burden.
Goods such as second-hand books, used personal clothing and certain low value household items are exempt by nature, and some goods are simply beyond the GST net because they are of too low value or too low in the economic food chain. Even casual or one-off sales by an individual (non-business) does not amount to “supply” under GST and therefore, they are not taxable.
GST exemption of such items is intended to avoid it becoming an impediment on reuse, sustainability and economic activity at the ground level. That said, dealers should still take care to document and classify correctly so that they do not run afoul of compliance, especially when an exemption is claimed. (GST on second-hand goods)
Record-keeping and Compliance Requirements
For businesses that sell second-hand goods, keeping proper records is not only best practice, but also a legal requirement. Dealers are required to ensure that purchase and sale invoices, even in the case of transactions with unregistered individuals. Where the dealer is covered by Rule 32(5) margin scheme, similar records should be kept in relation to both purchase price and selling price as it is possible to compute the margin on which the tax has to be charged.
A tax invoice is not mandatory in the margin scheme (a bill of supply is sufficient), it is imperative to maintain serially numbered bills, stock registers and suppliers information even from unregistered sources. This is very crucial and especially so at times of audits or scrutiny by the department.
In addition to this, returns are required to be filed on a monthly basis or quarterly basis as per the category of the taxpayer, and any GST pertaining to margins needs to be appropriately reported in GSTR-3B and GSTR-1, as applicable. If any input tax credit claimed is ineligible for the margin scheme, adjustments should be made or reverse such input tax credit.
In brief, even though the margin scheme reduces over the charges, responsibility for keeping clean and tidy books is hinge on the shoulders of second-hand dealers.
Conclusion (GST on Second-Hand Goods)
The second-hand goods business has become an important segment of the economy in India, giving consumers low-cost options and new business avenues for traders. Notably, GST has not formulated separate categories for the taxation of used goods, but has rather provided practical provisions such as the margin scheme and key exemptions that promote the used goods sector.
The law seeks to strike compliance versus business convenience balance by taxing only the margin versus the full resale value of the transaction, and also easing the reverse charge burden for certain business-to-business transactions. However, dealers must keep requisite records and comply with GST rules devoutly to avoid running foul of law.
GST appears complicated; however, it legitimately paves the way for the growth of a better-organized and visible second-hand economy.
Author Details: Ananya Pathak, 4th year, B.Com LL.B., Jiwaji University
References:
- https://taxguru.in/goods-and-service-tax/gst-sale-second-hand-goods.html
- https://kb.icai.org/pdfs/PDFFile5b432e1c91b870.37721702.pdf
- https://cleartax.in/s/margin-scheme-under-gst
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