Madras High Court on UPI Receipts and Second-Hand Goods: Margin Scheme Must Be Examined Before GST Levy

Overview

The Madurai Bench of the Madras High Court in Aboobucker Siddiq Vs Appellate Deputy Commissioner (GST) has clarified an important issue frequently arising in GST assessments—whether all UPI credits appearing in a bank account can be straightaway treated as taxable turnover.

The Court has ruled that such an approach is impermissible, particularly where the assessee deals in second-hand goods and invokes the benefit of Rule 32(5) of the CGST Rules, 2017. The impugned assessment order, which had treated gross UPI receipts of about ₹62.38 lakh as taxable turnover, was quashed and the matter remanded to the Assessing Authority for a fresh decision.

This judgment is a critical reminder that assessments must adhere to the statutory valuation mechanism under GST and cannot be based solely on bank or UPI credits without considering the nature of the business and applicable special provisions such as the margin scheme.

Factual Background

Nature of Business and Transactions

The assessee in this case was engaged in buying and reselling second-hand mobile phones. For the Financial Year 2021-2022, his bank account reflected significant credits received through UPI transfers, cumulatively amounting to approximately ₹62.38 lakh.

The GST Department treated the entire quantum of these UPI receipts as taxable outward supplies. Relying purely on the bank data, the authority computed tax, interest, and penalty on the full amount, without segregating margin from gross turnover.

Assessee’s Stand

The assessee asserted the following:

  • He was dealing exclusively in second-hand mobile phones.
  • The receipts reflected in his bank account were sale proceeds from these second-hand goods.
  • His effective profit or value addition was only about 3% of the turnover, not the entire credited amount.
  • He had not availed any Input Tax Credit (ITC) on the purchases of second-hand mobiles.
  • Consequently, his case fell squarely under the special valuation mechanism prescribed in Rule 32(5) of the CGST Rules, 2017, and GST was payable only on the margin (selling price minus purchase price), not on the entire sale consideration.

The grievance raised before the High Court was that the Assessing Authority had not even examined the applicability of Rule 32(5) and had instead mechanically equated UPI credits with taxable turnover.

Rule 32(5) of the CGST Rules, 2017 – Margin Scheme for Second-Hand Goods

Essence of the Provision

Rule 32(5) of the CGST Rules, 2017 provides a specific method for valuation in cases where an assessee is engaged in:

  • Buying and selling used/second-hand goods, and
  • Not availing Input Tax Credit on the purchase of such goods.

Under this rule:

  • GST is chargeable only on the “margin”—i.e., the difference between the selling price and the purchase price of the goods.
  • If the selling price is less than the purchase price, the margin is treated as nil for GST purposes.

The intention is to ensure that tax is levied only on the value addition made by the reseller of second-hand goods, and not on the entire transaction value again and again as the goods change hands.

Rationale Behind the Margin Scheme

The margin scheme aims to:

  • Avoid cascading effect and multiple taxation of the same goods.
  • Recognize that second-hand goods already suffered tax at the time of original supply.
  • Provide a simplified and fair basis of valuation for dealers who merely trade in used goods without significant further processing.
  • Ensure that the tax base reflects actual economic value addition, not gross bank inflows.