Goods and Services Tax – GST – By: – CAPRATIK DHRUVE – Dated:- 4-7-2017 – GST – Impact on Second Hand Goods Industry (an undiscussed theory) Executive Summary / Background: The industry of second hand goods in India is substantially growing since last many decades. There is a huge market of traders dealing in only second-hand commodities which include four wheelers, two wheelers and electronic items like mobiles, laptops, gaming consoles, wrist-watches, women hand bags, jewellery etc. Most of these businesses involve luxury items. Even small group commodities like books, clothes, etc. are gaining attention over the period. There are a lot of re-commerce websites, selling pre-owned luxury items including high-fashion apparel, footwear, clothing accessories, mobiles, imported stuff, etc. Such websites are gaining attention among the fashionistas who want best brands without affecting their pockets. Since the second hand goods industry has been growing much and has become an important pa
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define second hand goods. Also none of the existing laws including Excise, State VAT Laws have defined second hand goods. Looking at the definition of Goods, Section 2(52) of the Central Goods and Services Tax Act states that 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 . Hence second hand goods, since not specifically excluded in the definition, are included in the definition of goods and the GST law shall apply to second hand goods in the same manner as it applies to new goods. (C) Levy of GST on sale of second hand goods As per Section 7(1) of the Central Goods and Services Tax Act, the expression supply includes 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 considerat
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icant impact on the business of unregistered persons and by implementing this mechanism, the Government has shifted the burden of collecting tax from unregistered persons to registered persons. As far as the second hand trade is concerned, there can be three different sources of procurement of second hand goods on which the applicability of Reverse charge depends. We will understand this with the help of an example. ABC & Co. is a registered dealer of second hand goods being electronic items like mobiles, laptops, etc. It may procure the second hand goods from three different sources as below: Example 1: Purchases from registered dealers: ABC & Co. buys second hand mobiles in bulk from XYZ & Co., which also has a business of new and/or old mobiles and accessories. XYZ & Co. is registered with GST. Since the supplier XYZ & Co. is registered, it would issue a GST invoice and would charge GST to the recipient ABC & Co. Hence, the question of Reverse charge does not
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Mechanism would be that since the supplier is unregistered, ABC & Co. would be liable to pay tax. But this is not the fact and the reverse charge would not apply to this supply. The reason is explained below: A supply, as per Section 7(1) as stated above, shall be a taxable supply only if it fulfills all the basic conditions stated therein. In order to constitute a 'supply', the following elements are required to be satisfied: a) the activity involves supply of goods or services or both b) the supply is for a consideration unless otherwise specifically provided for c) the supply is made in the course or furtherance of business d) the supply is made in the taxable territory e) the supply is a taxable supply f) the supply is made by a taxable person. In the above example 3, the supply made by Mr. T to ABC & Co. is not made in the course or furtherance of business of Mr. T. In fact, Mr. T does not have any business of mobiles as such. Hence, the supply shall not attract t
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shall be ignored. (F) Conditions for attracting the provisions of margin scheme as per Rule 6(5): A few conditions shall be followed by a second hand goods dealer to avail the benefit of the rule of margin scheme: a) The supply should be of second hand goods only. b) Pre-owned goods are not necessarily deemed to be second hand goods or used goods. The goods should actually be used before. c) The person should be dealing in both buying and selling of second hand goods. Just one or two sales of unwanted second hand goods/assets cannot be deemed to be dealing in such goods. d) Minor processing is allowed. The dealer can carry out minor processing like repairs, refurbishing, re-boxing, etc. d) Nature of goods should not change. If different accessories and goods are bought and assembled into a new kind of product, which is different in nature as compared to the goods bought earlier, the valuation rule benefit would not apply. e) No input tax credit should have been availed on purchases. T
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or GST paid and hence, the above valuation rule does not apply. Hence, ABC & Co. shall be liable to pay GST on entire sales value and shall claim Input tax credit of GST paid on purchases. Example 2: Purchases from unregistered dealers: ABC & Co. has bought goods from an unregistered dealer (PQR & Co.) and it would have paid GST to the Government as per Reverse Charge mechanism. Since it would have already paid the tax, it will surely claim the input tax credit for GST paid and hence, the above valuation rule does not apply. Hence, ABC & Co. shall be liable to pay GST on entire sales value and shall claim Input tax credit of GST paid on purchases. Example 3: Purchases from unregistered customers: ABC & Co. has bought goods from an unregistered customer Mr. T and it would not have paid any GST to Mr. T or to Government since the provisions of Reverse Charge mechanism do not apply. Since it would have not paid the tax, the above valuation rules shall be applied. Hence
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t tax credit. So, more procedures need to be followed by such dealers. (c) The dealers who procure goods directly from end-users or customers, would carry lower tax burden i.e. no tax on purchases, and on the other hand, tax only on their margins and hence, they would end up in having a better profitability as well as a better cash flow. (H) GST Rates on second hand goods: Since there is no distinction between new goods and second hand goods under GST Law, the GST rates to be applied to used goods would be same as if they were new goods. (I) Global scenario of tax on second hand goods: The transactions of second hand goods being sold by non-taxable individuals not having business are exempt in most of the countries all over the globe. Also many of the countries having VAT/GST laws have margin schemes for dealers in second hand goods. Countries like Singapore, Malaysia have specific rules and guidance notes for taxes on second hand cars. New Zealand specifically excludes livestock and g
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s and Services Act (http://cbec.gov.in/htdocs-cbec/gst/cgst-act.pdf) 2) Integrated Goods and Services Act (http://cbec.gov.in/htdocs-cbec/gst/igst-act.pdf) 3) Determination of Value of Supply Rules (http://cbec.gov.in/htdocs-cbec/gst/valuation-gst-rules-17052017.pdf) 4) FAQs on GST by CBEC, New Delhi (http://cbec.gov.in/htdocs-cbec/gst/new-faq-on-gst-second-edition.pdf) 5) Malaysia – Guide on Relief for second-hand goods (Margin Scheme) issued by Royal Malaysian Customs (http://gst.customs.gov.my/en/rg/SiteAssets/industry_guides_pdf/New_Folder/GUIDE%20ON%20MARGIN%20SCHEME%2002112015.pdf) 6) Singapore – GST Guide for Motor Vehicle Traders (Second Edition) issued by Inland Revenue Authority of Singapore IRAS (https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/eTax_Guides/etaxguide_GST_Motor%20Vehicle.pdf) 7) New Zealand – GST on special supply rules (http://www.ird.govt.nz/gst/additional-calcs/calc-spec-supplies/calc-special/special-supplies-r-v.html) The author is a practicing Char
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