Author - Shagun Gupta, CBLT Member
Introduction
The Goods and Services Tax (GST) is considered to be one of the most prominent tax reforms in Indian history. The GST regime came into effect in July after a Constitutional Amendment in 2016. It was implemented throughout the country with the objective of bringing uniformity and streamlining the indirect tax provisions. GST replaced various central and state taxes such as VAT, Excise duty, Service tax, etc., and eradicated the scattered indirect tax framework that previously existed, simplifying the compliance by taxpayers. The introduction of GST has influenced several marketplaces and to study the effect of GST on certain specified marketplaces, in-depth research and analysis are necessary to comprehend these effects.
This article is concerned with studying the effect of GST on the second-hand goods market. Recent trends indicate that there has been a significant rise in transactions in this market. Although second-hand goods have not been defined by the legislature, these are essentially the goods that have entered the marketplace after being sold and taxed once. This market is gaining momentum because it enables consumers to obtain quality products at a cheaper price, whether it be used cars or apparel, and it guarantees inclusivity for low-income consumers.
To administer the tax implication on the second-hand goods market, the government came up with the Margin Scheme to manage the taxpayer’s liability in this sector. This article scrutinizes an interpretative issue related to Input Tax Credit (ITC) to be claimed on input services availed to facilitate the sale of second-hand goods.
ITC is a pivotal concept within the larger structure of the GST. The term "Input Tax Credit" (ITC) is the tax that a taxpayer can claim back while making business purchases. By virtue of this provision, the taxpayer can set off the GST paid on inputs, such as raw materials against the GST paid on outputs, i.e., the finished product, which helps in curtailing the tax liability altogether, hence minimising the cost of doing business. ITC was introduced to eradicate the “cascading effect” of tax, which essentially translates to “tax on tax”. ITC intersects in a complicated manner with the Margin Scheme under GST, a notable provision introduced specifically for the second-hand goods industry such as used cars.
The Margin Scheme and blockage of credit on Input Services:
Under the GST Margin Scheme, dealers of second-hand goods are permitted to sell their products by paying GST solely on the difference between the selling price and the total transactional value, i.e., the purchase price of the said product. There might arise a problem of double taxation if the whole value of the goods in question were subject to taxation. To illustrate this issue, suppose a person X bought a new car for ₹10 lakhs on which he paid GST at the prescribed rate at the time of the transaction. After 2 years, he sells the car to a second-hand car dealer for ₹6 lakhs and the dealer resells the car for ₹7 lakhs. Here, without the margin scheme, GST would be charged on the entire resale price, on which the tax has already been paid during the original purchase but under the margin scheme, the seller incurs the tax liability only on the margin amount of ₹1 lakh, which provides safeguard against double taxation because these used goods were previously subject to the tax and are only getting back into the supply chain.
A supplier that deals in second-hand items and avails the Margin Scheme is not eligible for ITC as per Rule 32(5) of the Central Goods and Services Tax (CGST) Rules, 2017. To continue running the business in a second-hand goods industry, it becomes quite an indispensable practice to avail numerous input services, counted as ‘other expenses’ which include but are not limited to technological services, IT services, marketing and advertising services, repair and maintenance, rental of real estate, etc. provided in the course of business and for which the relevant GST is paid.
The issue that arises at hand is whether the restriction of ITC under this Margin Scheme extends to other goods and services that are used by the dealers of second-hand goods in furtherance of their business, such as the aforementioned services.
Interpretation of the issue by the ruling authorities:
In the case of M/s. Deccan Wheel, the Authority for Advance Ruling (AAR) Maharashtra established that a dealer of second-hand motor vehicles is not entitled to claim ITC on any expenses sustained in the course of ‘furtherance of the business’, the AAR in this case deliberated on the contention- “Can we claim Input Tax Credit on other Indirect Expenses incurred for the purpose of business such as Rent, Commission, etc.?” This question was negated on the premise that if a taxpayer is selling second-hand merchandise while availing the benefit under the Margin Scheme, such taxpayer cannot be entitled to claim ITC on the second-hand goods in question, directly or indirectly.
This issue had been in dispute in front of the Authority for Advance Ruling, Tamil Nadu as well, where the AAR also refused the Applicant to claim ITC once the Margin Scheme was availed. Rule 32 (5) of the CGST Rules while laying down the eligibility for the Margin Scheme mentions qualifying criteria that “where no input tax credit has been availed on purchase of such goods”, it might be argued against the taxpayer that the language of Rule 32 (5) poses a dilemma- the taxpayer can either avail the Margin Scheme to avoid double taxation and thus forsake the ITC on such goods or the taxpayer can facilitate the sale of such goods on the normal tax rate and avail ITC. It is fundamental to the common law that no party can be allowed to accept and discard the same thing. Hence, as per the rationale of the ruling authorities, a taxpayer cannot, at the same time avoid taxation under the Margin Scheme and claim ITC on the input services or other expenses incurred in the course of furtherance of business as it comes within the ambit of claiming ITC indirectly whereas Rule 32 (5) does not allow such claim.
An alternative interpretation: In favour of the taxpayer
In the debate herein, to determine whether ITC can be claimed on ‘other expenses’ which are sustained in order to further the business activities of the dealers who deal in second-hand goods, it is a valid contention that the Ruling Authorities, as illustrated above, might have misinterpreted or have taken a much narrow view of the provision laid down in Rule 32 (5).
Rule 32(5), in contrast to the interpretation established by multiple Ruling Authorities, just limits the credit of input tax paid by the registered person on the purchase of the subject items that are being sold by it. It does not limit the appellant's ability to claim the ITC for any goods and services utilized in connection with the sale of used items. The wording of Rule 32(5), which refers to "such goods" makes this clear. The term "such goods" does not encompass the whole range of inputs and input services that the taxpayer uses to facilitate the sale of used goods. Even if it were thought that the term "such goods" in Rule 32(5) and Notification No. 8/2018, Central Tax (Rate) restricted ITC for inputs other than second hand goods. For one, it could be stated that it restricted ITC for inputs, i.e., goods and not input services. Alternatively, it may also be interpreted that ITC is only restricted for second-hand goods and not other goods and services used as input that are used for refurbishing the goods.
Moreover, the statute contains no explicit prohibition that would prevent the taxpayer from receiving the ITC for the different input services he has utilized in the course of his business activities. Such an ITC that was properly claimed in line with the terms of Sections 16 and 17 of the CGST Act cannot be withheld from the taxpayer in the absence of any explicitly stated restrictions. In Hindustan Zinc Ltd. v Union of India, it has been acknowledged that the ability to obtain credit is a right that cannot be taken away without a relevant and express legal provision. As stated above, there is no express bar in the language of Rule 32 (5) that might indicate the ineligibility of ITC on the input services and other expenses incurred in the facilitation of the sale of second-hand goods.
The Karnataka Authority for Advance Ruling in Attica Gold Private Limited held that Rule 32(5) of the CGST Rules prohibits a registered taxpayer from claiming input tax credit on the purchase of the used goods that he is supplying, but does not restrict the registered taxpayer from claiming input tax credit on capital goods or input services, or corresponding expenses such as rent, advertising costs, commission, professional fees, and other similar expenses.
Conclusion:
The issue of interpretation as identified above, can be deciphered by the legislators as the position of ITC to be claimed on input services can be clarified in the statute itself. Since there is a lack of jurisprudence and academic deliberation on the issue, a broader narrative is required in the meantime to preserve the interest of the taxpayer. The Apex Court, in ALD Automative v. Commercial Tax Officer, has emphasized the importance of strict interpretation of taxing statutes. Hence, it must not be construed by the Ruling of the AAR in the absence of any express provision, that ITC is completely denied on expenses incurred in furtherance of the sale of second-hand goods.
In essence, the Margin Scheme's rejection of ITC on input services raises a serious interpretive question that needs to be addressed by both juridical bodies and policy makers. Although eliminating double benefits is the rationale for this refusal, its effects on consumers and enterprises must be carefully evaluated. A more balanced strategy could better match the plan with the main goals of the GST framework—ensuring justice, discouraging tax evasion, and fostering ease of doing business—possibly through partial ITC or other modifications.
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