AAR Provides Clarity on Margin Scheme for Second-Hand Goods under GST

AAR Provides Clarity on Margin Scheme for Second-Hand Goods under GST

Introduction

The Gujarat Authority for Advance Ruling (AAR) has provided a significant ruling on the applicability of the margin scheme under GST for dealers of second-hand machinery. The decision allows businesses to adopt the margin scheme for used goods while continuing regular GST practices for their existing trade under the same registration.

Factual Background

Jitendra Equipment, a Rajkot-based dealer in construction machinery, had sought an advance ruling on whether it could opt for the margin scheme under Rule 32(5) of the CGST Rules, 2017, for its new line of business in second-hand equipment. The company plans to expand into the used goods market without obtaining a separate GST registration.

About the Scheme

The AAR clarified that the margin scheme can be adopted exclusively for second-hand goods while following standard valuation rules for other business activities. The margin scheme allows businesses to calculate the value of supply as the difference between the selling price and the purchase price, provided no input tax credit (ITC) is claimed on the purchase.

Reasoning & Analysis

The AAR's decision was based on the interpretation of Rule 32(5) of the CGST Rules, 2017, which provides for the margin scheme for second-hand goods. The authority held that the scheme is optional and can be applied selectively based on the supplier's registration status. The AAR also relied on a similar decision in the case of Tej Kumar Jain (2021), where the Rajasthan Appellate Authority had upheld the interpretation that expenses for refurbishment or improvement cannot be added to the purchase price for margin calculation, and ITC on these costs is disallowed under the margin scheme.

The AAR emphasized that the margin scheme aims to prevent double taxation, as second-hand goods have already borne tax in their initial supply. Additionally, the AAR confirmed that no GST is payable under the reverse charge mechanism for intra-state purchases from unregistered sellers, in line with Notification No. 10/2017. The authority's interpretation provides clarity on the application of the margin scheme and its implications for businesses dealing in second-hand goods.

Implications

The decision provides much-needed clarity for dealers navigating the complexities of GST compliance in the used machinery market. It is expected to streamline operations for businesses like Jitendra Equipment, enabling them to diversify into the second-hand goods segment without cumbersome regulatory hurdles.

Outcome

The AAR's straightforward interpretation of Rule 32(5) offers a practical framework for dealers to manage their tax liabilities effectively. However, the AAR declined to rule on e-way bill and e-invoicing requirements, clarifying these aspects lie outside the purview of advance rulings. The decision is expected to benefit businesses dealing in second-hand goods and provide clarity on the application of the margin scheme under GST.