Gross Margin Scheme
Second-Hand dealers who purchased goods free of GST may use the Gross Margin Scheme (GMS) to charge and account for GST.
What is Gross Margin Scheme?
A GST-registered person is required to charge GST at the prevailing rate on the full value of the goods he sells.
As GMS is a special scheme that allows you to account GST (i.e. output tax) only on the gross margin. The buyer of your used goods is not allowed to claim any input tax on the goods, even if he is a GST-registered person.
You cannot use the loss from one sales transaction to offset the gross margin on another sales transaction for the purpose of determining the GST (i.e. output tax) to be accounted by you.
Charging GST on Gross Margin
Under the Gross Margin Scheme, GST is accounted for on the gross margin instead of full value of the goods supplied.
Gross Margin = A – B
where A is the consideration received for goods sold, i.e. the selling price.
B is the consideration paid for goods purchased, i.e. the purchase price.
If A (selling price) is lower than or equal to B (purchase price), the gross margin is treated as nil and GST is not chargeable. However, the selling price is to be reported in Box 1 (Total value of standard-rated supplies) of the GST return.
If A (selling price) is greater than B (purchase price), then GST (i.e. output tax) is accountable by you on the gross margin based on the tax fraction i.e. Gross Margin x 7/107.
You are in the business of selling second-hand cars. You bought a car from a non-GST registered person at $1,000 and sold the car to your customer for $1,500.
Based on the Gross Margin Scheme:
GST = ($1,500 - $1,000) x 7/107 = $32.71
For GST reporting purposes
Value of standard-rated supply: $1,467.29 (i.e. $1,500 - $32.71)
Output tax due: $32.71
Conditions for Using the Scheme
You are in the business of selling used goods
For instance, you are in the business of selling second-hand motor vehicles electrical appliances, furniture, jewellery, etc.
You should not use the scheme if you make one-off or occasional sale of used goods such as disposal of business assets.
The used goods were purchased free of GST.
This includes goods purchased from:
- Non-GST registered suppliers (e.g. an individual); or
- GST-registered suppliers who used the Gross Margin Scheme (i.e. you have not been issued a tax invoice and have not claimed any input tax).
Points to consider
Updated! Before you apply for GMS, you should consider the following factors:
- You will have added responsibilities to ensure that all conditions for applying GMS are satisfied and able to fulfil all obligations as stated in the self-review and declaration form.
- You will have to maintain
records and accounts for all used goods sold under GMS (66KB).
- You will have to ensure that GST is correctly accounted on the gross margin of used goods sold by you.
- The incorrect use of GMS will make you liable to penalties under the GST legislation.
Applying for the Scheme
Updated! Complete and submit the
Self-review of Eligibility and Declaration on Use of Gross Margin Scheme Form after verifying that all conditions in the Form are satisfied.
You can begin to use the Gross Margin Scheme from the date of submission of the Form. No further approval is required from IRAS.
If you have previously received IRAS' approval to use the scheme, you can continue to do so as long as you still satisfy the conditions in the Form. You do not need to submit the Form again to IRAS.