Introduction
In India, a substantial number of individuals, particularly middle-aged and senior citizens, prioritize thriftiness and make best use of their resources. This mindset has contributed to the steady growth of the used/second-hand goods industry. However, suppliers in this industry may be unaware of the GST implications of their transactions. This article aims to highlight the GST implications of supplying second-hand goods.
There is no independent and separate definition of the term "second-hand/pre-owned goods" under GST Acts and Rules. Therefore, "second-hand goods" shall also be governed by the definition of the term "goods."
All Sections and Rules referred in this Article pertain to Central Goods and Services Tax, 2017 and Central Goods and Services Rules, 2017, respectively.
Brief analysis of the definition of the term "Goods"- Section 2(52)
2(52) "Goods" means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;
A careful perusal of the above definition reveals as follows:
(a) It is an exhaustive definition because it uses the expression "means." Consequently, the scope of the given definition can not go beyond the stated scope.
(b) Every kind of movable property other than money and securities shall fall within the ambit of this definition. It also is obvious that "goods" shall not mean "immovable property" by any stretch of imagination.
(c) "Goods" shall specifically include the following:-
(i) Actionable claim.
(ii) Growing crops, grass and things attached to or forming part of the land, but which are agreed to be severed before supply or under a contract of supply.
Brief analysis of the relevant part of the definition of the term "supply" - Section 7(1) (a)
Section 7(1) (a) reads as under:
7. Scope of supply.- (1) For the purposes of this Act, the expression "supply" includes-
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
An attentive perusal of the definition of the term "supply" brings to light the following:
(i) It is an inclusive definition. Therefore, its scope is not confined to what is said in the above definition.
(ii) 'Supply' includes all forms of supply of goods, or services or both. Illustrativeforms of supply includesale, transfer, barter, exchange, licence, rental, lease or disposal.
(iii) Supply must be made for a 'consideration.' The Consideration refers to something received or given in exchange for a supply of goods or services. Consideration can take various forms, including an act (doing something), forbearance (not doing something), a promise to do or not to do something. Further, consideration can be past (something already done or given) or present (something currently being done or given) or future (something to be done or given later). Furthermore, consideration can be broadly classified as monetary consideration and non-monetary consideration.
(iv) Supply must be made in the course or furtherance of business.
Relevance of definitions of "goods" and "supply" in the context of sale of second-hand goods
When a person undertakes the activity/ transaction of second-hand "goods"(movable property) for a consideration in the course or furtherance of his business, the same shall meet the essential ingredients of the definition of "goods" as well as "supply." It is worth highlighting here that there is no difference between sale of fresh/ first-hand and second-hand goods from the perspective of GST because both fall within the ambit of the term "supply."
Valuation of Supply of Second-hand Goods
According to Section 15(1), the value of a supply of second-hand goods is decided by the transaction value, which is the price actually paid or payable for the supply. However, the transaction value is considered the value of the taxable supply only when the following conditions are met cumulatively:
1. The supplier and recipient are not related; and
2. The price is the sole consideration for the supply.
Definition of Related Persons
The term "related persons" is defined in the explanation after Section 15(5). Two persons are considered related if they meet any of the following criteria:
- They are officers or directors of each other's businesses.
- They are legally recognized partners in business.
- One is the employer and the other is an employee.
- One person directly or indirectly owns, controls, or holds 25% or more of the outstanding voting stock or shares of the other.
- One person directly or indirectly controls the other.
- Both are directly or indirectly controlled by a third person.
- Together, they directly or indirectly control a third person.
- They are members of the same family.
The term "person" includes legal persons, and individuals associated in business, such as sole agents or distributors, are also considered related.
Determination of the value of supply of second-hand goods when supplier and buyer are related or price is not sole consideration
Section 15(4) provides that when the supplier and buyer are related or the price is not the sole consideration, the value of the supply of second-hand goods shall be determined in accordance with Rule 28 which shall apply when second-hand goods are supplied between distinct or related persons, other than through an agent. Rule 28(1) provides the following manner for deciding the value of second-hand goods:
(a) Open Market Value(OMV)
(b) Value of like kind and quality goods- However, this option shall be used only when open market value of second-hand goods is not available. For instance, in case of supply of unique and antique second-hand goods.
(c) Value on the basis of cost (Rule 30) and Residual method (Rule 31)
Rule 30 provides that if the value cannot be decided using the above methods, the value is 110% of the cost of acquisition of the goods. Rule 31 provides that if all else fails, the value is decided using reasonable means consistent with the principles of Section 15 and the Determination of Value of Supply given under Chapter IV of the CGST Rules.
The above methods ensure that the value of second-hand goods is decided fairly and accurately, even in complex situations.
Supply of Second-hand Capital Goods/Plant and Machinery with ITC
When supplying second-hand capital goods or plant and machinery for which Input Tax Credit (ITC) was claimed, Section 18(6) and Rule 40(2) mandate payment of the higher of two amounts:
1. The ITC claimed, reduced by 5% for each quarter or part thereof since the invoice date.
2. The tax on the transaction value determined under Section 15.
Example: Supply of Plant and Machinery
Shreyans Ltd. buys a plant and machinery on 04.01.2024, for Rs 8,00,000 + 12% GST (Rs 96,000). Later, the Company supplied it on 28.04.2025, for Rs 5,00,000.
Calculating the Amount to be Paid
- Time gap between purchase and supply: 6 quarters
- Reduction in tax paid: 30% of Rs 96,000 = Rs 28,800
- Amount of ITC to be paid: Rs 96,000 - Rs 28,800 = Rs 67,200
- Tax on transaction value: Rs 5,00,000 x 12% = Rs 60,000
Amount to be Paid
The higher amount between Rs 67,200 (ITC) and Rs 60,000 (tax on transaction value) is Rs 67,200. Therefore, Shreyans Ltd. shall be required to pay Rs 67,200.
In case of supply of refractory bricks, moulds, dies supplied as scrap, tax shall be payable on transaction value
In terms of proviso to Section 18(6) a specific exception applies to refractory bricks, moulds, dies, jigs, and fixtures supplied as scrap. In such cases, tax is payable on the transaction value determined under Section 15, without comparing it to the reduced ITC amount.
Margin Scheme for Second-Hand Goods
Rule 32(5) outlines the Margin Scheme for deciding the value of taxable supplies made by dealers in second-hand goods. This scheme applies when:
- The dealer buys and sells used goods with or without minor processing that does not change the goods' nature.
- No input tax credit (ITC) is claimed on the purchase of such goods.
Under the Margin Scheme, the value of supply is the difference between the selling price and the purchase price. This scheme is optional, and dealers can choose whether to adopt it.
Example:
Mr. Naman, a second-hand car dealer, buys a car for Rs 1,40,000 and sells it for Rs 2,00,000 without claiming ITC. The value of taxable supply would be Rs 60,000 (Rs 2,00,000 - Rs 1,40,000).
Managing Negative Values
If the value of supply under the Margin Scheme results in a negative figure, it is ignored for GST payment purposes. For instance, if Mr. Naman purchases another car for Rs 2,20,000 and sells it for Rs 1,80,000, the value of supply would be -Rs 40,000 (Rs 1,80,000 - Rs 2,20,000). In this case, no GST would be payable.
Repossession of Goods
When a lending institution repossesses goods from a defaulting unregistered borrower, the value of the goods is deemed to be the purchase price reduced by 5% for every quarter or part thereof between the purchase date and disposal date.
Example:
Roshan buys a car for Rs 10,00,000 in January 2023 and defaults on loan repayments. The bank repossesses the car in December 2024 and sells it for Rs 6,70,000. The value of the repossessed car would be Rs 6,00,000 (Rs 10,00,000 - 5% of Rs 10,00,000 × 8 quarters). The value of outward supply under the Margin Scheme for the bank would be Rs 70,000 (Rs 6,70,000 - Rs 6,00,000).
GST Rate on New Cars vs. Second-Hand Cars
The GST rate on new cars in India varies based on the vehicle's type, use, and characteristics. While most cars attract a standard GST rate of 28%, specific categories like vehicles for disabled/handicapped individuals and baby carriages have a lower GST rate of 5%. Additionally, a compensation cess of up to 22% may be levied on new cars, depending on factors like engine capacity, length, and fuel type.
Concessional Rate for Second-Hand Cars
However, a different GST rate structure applies to second-hand cars. As per Notification No. 08/2018-Central Tax (Rate) dated 25.01.2018 (as amended), second-hand motor vehicles are eligible for a concessional GST rate of 18% under the Margin Scheme. Furthermore, no compensation cess is levied on the supply of old and used motor vehicles, as per Notification No. 01/2018-Compensation Cess (Rate) dated 25.01.2018.The reduced GST rate of 18% with no compensation cess has proven beneficial for second-hand motor vehicle suppliers, making the industry more competitive and attractive.
Threshold Exemption Limit for Second-Hand Motor Vehicle Dealers
Second-hand motor vehicle dealers must pay GST on the margin amount. However, when deciding the need for registration under Section 22(1), the actual sale price (transaction value) of the vehicles is considered. It is essential to note that only registered dealers are bound to pay GST.
Parting Comments
Dealers of second-hand goods must comply with GST provisions and rules, just like any other business. To avoid potential consequences, such as search, seizure, and show-cause notices, registered dealers should:
- Understand and adhere to applicable GST provisions
- Discharge GST liabilities promptly and accurately
- Make timely payments to the government
By following GST provisions in letter and spirit, second-hand goods dealers can minimize risks and ensure smooth business operations.
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