APRIL 22, 2019

By H S Brar

RULE 32 of the Central Goods & Services Tax Rules, 2017 provides for determination of value in respect of certain supplies, out of which the transactions pertaining to taxable supply by a person dealing in buying and selling of second hand goods merit a closer examination.

Statutory provisions of Rule 32(5) of the CGST Rules, 2017 are reproduced below for ready reference:

"32. Determination of value in respect of certain supplies.- (1) Notwithstanding anything contained in the provisions of this Chapter, the value in respect of supplies specified below shall, at the option of the supplier, be determined in the manner provided hereinafter.

...

(5) Where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored:

...”

As per the above provisions, on a taxable supply of second-hand goods by a trader, as such or after minor processing, where no ITC has been availed, the taxable value shall be equal to his profit margin and if he is selling the goods at a loss, no tax needs to be paid.

Notification No. 10/2017-Central Tax (Rate) dated 28.06.2017 states as under:

G.S.R. (E).- In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts intra-State supplies of second hand goods received by a registered person, dealing in buying and selling of second hand goods and who pays the central tax on the value of outward supply of such second hand goods as determined under sub-rule (5) of rule 32 of the Central Goods and Services tax Rules, 2017, from any supplier, who is not registered, from the whole of the central tax leviable thereon under sub-section (4) of section 9 of the Central Good and Services Tax Act, 2017 (12 of 2017).

2. This notification shall come into force with effect from the 1st day of July, 2017.

[F.No.354/117/2017-TRU]

(Mohit Tewari)
Under Secretary to the Government of India

The above Notification exempts intra-State purchases of second hand goods by a registered trader from an unregistered supplier, from CGST leviable thereon on reverse charge basis. This is different from the suspension upto 30.09.2019, from the tax payable on reverse-charge basis in terms of Section 9 of the CGST Act, 2017, as this is specific to a particular set of transactions without any sunset clause. The condition for the said exemption is that the taxable value of sales made by the registered dealer should be determined under Rule 32(5) of the CGST Rules, 2017.

Further, in case the said goods are sold by a registered dealer to another registered dealer, the latter can also avail the benefit of the said valuation method, subject to the condition that he does not avail of ITC of the tax paid by the supplier. The said valuation method can be adopted in case of Inter-State sales also as Section 20(iii) of the IGST Act, 2017 enables the applicability of the provisions of the CGST Act, 2017 on the aspect of valuation of supply, to the former. Rule 2 of the IGST Rules, 2017 states that the CGST Rules, 2017 covering the items stated in Section 20 of the IGST Act, 2017 shall be applicable to the transactions leviable to IGST. Thus, the valuation in respect of inter-State transactions between two registered dealers can be in terms of Rule 32(5) of the CGST Rules, 2017.

The GST Council had examined this issue and a clarification had been issued by way of a Press Release on 15.07.2017. For the sake of easy reference, it is being reproduced verbatim:

PRESS RELEASE

REGARDING OLD AND USED BOTTLES

Doubts have been raised regarding the applicability of the margin scheme under GST for dealers in second hand goods in general and for dealers in old and used empty bottles in particular.

2. Rule 32(5) of the Central Goods and Services Tax Rules, 2017 provides that where a taxable supply is provided by a person dealing in buying and selling of second hand goods, i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored. This is known as the margin scheme.

3. Further, Notification No. 10/2017-Central Tax (Rate), dated 28.06.2017 exempts central tax leviable on intra-State supplies of second hand goods received by a registered person, dealing in buying and selling of second hand goods [who pays the central tax on the value of outward supply of such second hand goods as determined under sub-rule (5)] from any supplier, who is not registered. This has been done to avoid double taxation on the outward supplies made by such registered person, since such person operating under the margin scheme cannot avail input tax credit on the purchase of second hand goods.

4. Thus, margin scheme can be availed of by any registered person dealing in buying and selling of second hand goods [including old and used empty bottles] and who satisfies the conditions as laid down in Rule 32(5) of the Central Goods and Services Tax Rules, 2017.

The above press release seeks to explain the 'Margin Scheme', as per which if a registered person, dealing in buying and selling of second hand goods, including old and used empty bottles, who sells them as such or after minor processing which does not change the essential character of the said goods and does not avail ITC on such goods, needs to pay CGST only on his profit margin. It also states that Notification no. 10/2017-Central Tax (Rate) exempts the tax payable on reverse charge basis by a registered person on purchases made from an unregistered person, in case the former adopts the valuation as per Rule 32(5) of the CGST Rules, 2017. Although para 3 of the above Press Release refers only to intra-State supplies by an un-registered dealer to a registered dealer, para 4 clearly states that the said scheme would be available to any registered person dealing in buying and selling of second-hand goods who satisfies the conditions laid in Rule 32(5) of the CGST Rules, 2017.

The gist of the above Rule, Notification and Press Release, is that a registered person dealing in sale and purchase of second-hand goods on intra-State basis needs to pay GST on only his margin subject to his non-availment of ITC on the said goods purchased from an unregistered person and payment on reverse charges basis has also been exempted vide the above Notification. This method of valuation also holds good for inter-State transactions between two registered persons. This scheme, called the 'Margin Scheme' in the press release dated 15.07.2017, was meant to deal with situations where a consumer had purchased certain goods and after some time wished to sell them off. Since such a person had not availed ITC, payment of GST on the said transaction would have amounted to double taxation. It only speaks about the processes undertaken by the registered dealer and is silent about the purpose to which the said goods may be put to use to, by the buyer. In normal circumstances, the registered dealer would be selling such goods to another consumer only.

However, the scenario changes when the goods in question are no doubt second-hand goods sold by an un-registered person, but the same are passed through one or more hands and are ultimately purchased by a recycler who does not intend to use them as such but intends to recycle them. Also, there is no criteria to differentiate between second-hand goods and scrap. We are well aware that what is scrap for the first world countries is second-hand goods for the third-world/developing countries like ours. Some examples of the above situation are as under:

Electrical appliances like fans, air conditioners, refrigerators, e-waste etc.

PET, Glass or Plastic bottles and other containers.

Old and used batteries.

Bicycles, two-wheelers and other modes of conveyance.

Books and periodicals.

The recycler in question will dismantle/segregate the materials and recycle the basic ingredients, i.e., plastic, glass, lead, iron, aluminium, paper etc.

In case, such a recycler is located in a State other than the States where Budgetary Support Scheme is in effect, there are chances that financially the sales by the last channel of unscrupulous traders are shown to non-existent buyers and physically, the goods find their way to a recycler/manufacturer who re-processes them and clears the re-processed goods without payment of GST. Given the provisions which allow for Nil tax to be paid on goods sold at a loss, the said unscrupulous traders can show sale of some portion of the goods at a loss to escape their liability of GST as also reducing their income to evade Income Tax.

An even larger threat to the tax collection looms, if the recycler is located in one of the States enjoying the benefit of Budgetary Support Scheme as he will be getting ITC of tax paid only on the margin of his supplier. His tax outflow through cash will increase manifold and so will his eligibility for Budgetary Support. The above scenario can be understood better from the comparative chart given below:

Figures in Rs.

There are a number of recycling industries operating in the States in which the Budgetary Support Scheme is operational. Also, some States may be providing similar support on the SGST payable by such manufacturers, which will only increase the benefit to the manufacturers in question.

The margin scheme was a step in the right direction and its intention of avoiding double taxation was noble and logical. However, the above scenario apparently had not been envisaged by the framers of the statutory provisions/notification and the GST Council. The foundation of GST regime is creation of chain of ITC so that all the channels are covered in the tax net, however, this scheme provides an avenue to the unscrupulous elements in recycling industry to indulge in tax evasion and misuse the Budgetary Support Scheme. It is, therefore, essential to omit Rule 32(5) of the CGST Rules, 2017.

(The views expressed are strictly personal.)