May 25, 2025 GST Compliance

Applicability of Margin Scheme and Its Computation Under GST

A comprehensive guide to understanding the margin scheme for second-hand goods under GST, including detailed computation methods, export implications, and practical examples.

Understanding the Margin Scheme Under GST

The margin scheme is a special valuation mechanism designed for businesses dealing in second-hand goods. It recognizes that these goods have typically borne tax during their initial sale, and therefore only taxes the value added by the dealer rather than the full transaction value.

Business Model: Deals in buying & selling second-hand goods
Conditions Met: No ITC claimed on purchase & goods sold as-is or with minor processing
Valuation Method: Selling Price - Purchase Price = Taxable Value
GST Calculation: Taxable Value × Applicable GST Rate
Step 1 of 4

Legal Framework and Provisions

The margin scheme is governed by specific provisions in the GST law:

Section 15(5) of the CGST Act

Authorizes the government to prescribe special valuation rules for certain categories of supplies, including second-hand goods.

Rule 32(5) of the CGST Rules

Specifies that for second-hand goods where no input tax credit has been claimed:

  • Taxable value = Selling price minus purchase price
  • Negative differences are ignored (no tax payable)
  • Minor processing costs can be added to the margin

Section 16 of the IGST Act

Exports are zero-rated supplies, applicable whether using margin scheme or full value.

Detailed Conditions for Applying the Margin Scheme

To qualify for the margin scheme valuation method, several conditions must be satisfied:

The supplier must be registered under GST
The business must ordinarily deal in buying & selling second-hand goods
No input tax credit was claimed on the purchase of these goods
Goods are sold as-is or after minor processing that doesn't change their nature
The supply is taxable (not exempt under GST)
Step 1 of 5

What Constitutes "Minor Processing"?

The law allows for minor processing that doesn't change the essential nature of the goods. Examples include:

  • Cleaning and refurbishing second-hand furniture
  • Replacing minor parts in used electronics
  • Repainting vehicles
  • Basic repairs to restore functionality

Significant modifications that change the product's character would disqualify the transaction from margin scheme valuation.

Computation Methodology

The margin scheme calculation follows a specific formula to determine the taxable value:

Margin Scheme Formula

Taxable Value = max(0, Selling Price - Purchase Price + Minor Processing Costs)

Where:

  • Selling Price (SP): Amount charged to the buyer
  • Purchase Price (PP): Amount paid to acquire the goods
  • Minor Processing Costs (MC): Expenses for refurbishing/repairing (if any)

GST Calculation

Once the taxable value is determined, GST is calculated as:

GST = Taxable Value × Applicable GST Rate

The applicable rate is the standard GST rate for that category of goods (as per the HSN classification).

Determine Selling Price (SP)
Identify Purchase Price (PP)
Add Minor Processing Costs (MC) if applicable
Calculate SP - PP + MC
If result is positive → Taxable Value
If result is negative → Taxable Value = 0
Multiply by applicable GST rate
Step 1 of 7

Practical Examples and Case Studies

Example 1: Domestic Sale with Profit

A dealer purchases a used laptop for ₹7,500 and sells it after cleaning for ₹10,000. No ITC was claimed on purchase.

Taxable Value = ₹10,000 (SP) - ₹7,500 (PP) = ₹2,500

GST @ 18% = ₹2,500 × 18% = ₹450

Example 2: Domestic Sale at Loss

A car dealer buys a used vehicle for ₹6,00,000 but sells it for ₹5,80,000 after minor repairs costing ₹5,000.

Taxable Value = ₹5,80,000 (SP) - ₹6,00,000 (PP) + ₹5,000 (MC) = -₹15,000 → Treated as 0

GST payable = ₹0

Example 3: Export of Second-Hand Goods

A dealer exports refurbished machinery purchased for ₹50,000 after spending ₹5,000 on repairs, selling for ₹65,000.

Taxable Value = ₹65,000 - ₹50,000 + ₹5,000 = ₹20,000

IGST on exports = 0% of ₹20,000 = ₹0

Supplier can export under LUT or pay IGST and claim refund

Special Considerations for Export Transactions

While exports are zero-rated regardless of valuation method, the margin scheme can still be beneficial:

Documentation Consistency

Maintains uniform valuation approach across domestic and export transactions

Financial Reporting

Provides clearer picture of actual margins earned on export sales

Future Audit Trail

Creates proper documentation in case of future GST audits

Export Procedures Under Margin Scheme

  1. Registration: Must be GST registered regardless of export turnover
  2. LUT/Bond: File Form GST RFD-11 to export without tax payment
  3. Invoice: Must show 0% IGST and indicate margin scheme valuation
  4. Shipping Bill: Acts as both export document and tax invoice
  5. Refund: If IGST paid, claim refund under Section 54 of CGST Act

Key Takeaways and Compliance Points

  • The margin scheme prevents double taxation by taxing only the value added in resale
  • Proper documentation of purchase prices is critical for compliance
  • Minor processing doesn't disqualify goods from margin scheme if nature unchanged
  • Exports can use margin scheme valuation but remain zero-rated either way
  • Negative margins result in no GST liability but must still be documented

Important Compliance Note

Businesses must maintain detailed records of all purchases and sales to substantiate margin scheme calculations. This includes:

  • Original purchase invoices
  • Proof of payment for purchases
  • Documentation of any processing costs
  • Sales invoices clearly indicating margin scheme application
  • Inventory records showing movement of second-hand goods

Need to create GST-compliant invoices? Try our free online invoice generator with all required GST fields at https://invoicessy.com/