For most businesses in India, the Goods and Services Tax is charged on the sale price. If you run a business selling used goods, the GST rules change. That’s where the margin scheme comes in. If your company qualifies, you can use this scheme to drastically reduce your monthly tax bill.
How Does the Margin Scheme Work?
In a standard sale transaction, GST is charged based on how much the customer pays. If you’re selling a sewing machine for ₹6000, the 12% GST would be ₹720. (Keep in mind there are also tax slabs for different goods and services so this affects the tax rate.)
If you use the margin scheme, things change. Instead of paying tax on the sale price, you pay tax on the margin, the difference between how much you paid for an item and how much you sold it for. So, if you bought the sewing machine for ₹5000 and sold it for ₹6000, you’d pay the 12% GST on ₹1000. That means you’d pay ₹120 in tax instead of ₹720.
What Goods Qualify for the Margin Scheme?
The margin scheme can only be used when you’re selling used and secondhand products. The law states that you’re allowed to do minor processing that doesn’t change the basic nature of the product. If you’re buying and selling used grandfather clocks, you could clean and polish them before selling them. But if you took out the mechanics and changed the clock into a bookshelf, it would not qualify for the margin scheme.
Do you repair, refurbish, or recondition your used goods before you sell them? As long as the nature of the product stays the same, you can still use the margin scheme. But you need to add the value of those upgrades to the margin. If you bought a clock for ₹1000 and sold it for ₹1500, the taxable margin would be ₹500. If you did ₹200 worth of repairs before selling, the margin would be ₹700.
What About the Input Tax Credit?
The margin scheme doesn’t apply to goods for which you’ve already claimed an input tax credit. Imagine you bought a computer for your business and paid ₹500 in GST to the seller. You can claim that ₹500 as an ITC to reduce your company’s tax bill. But when you go to sell that computer down the road, it doesn’t qualify for the margin scheme.
When you’re selling goods under the margin scheme, you’re not allowed to give buyers a taxable invoice. Basically, this means they cannot claim the ITC for their businesses. It’s important to let your buyers know this in advance, especially if you sell to businesses.
With the margin scheme, the government hopes to reduce double taxation. Instead of taxing the products, twice, this scheme only taxes the added value. That’s good news for both you and your buyers. It keeps your tax bill low and allows you to charge lower prices. In many cases, the margin scheme can help you run a more profitable direct-to-consumer business.