The debt balance is not the deemed purchase-price base
The proviso to CGST Rule 32(5) addresses goods repossessed from a defaulting borrower who is not registered, for recovery of a loan or debt. It deems purchase value by reducing the defaulting borrower's purchase price by five percentage points for each quarter or part between purchase and disposal by the person repossessing. Establish the main margin-scheme conditions as well; this is not a blanket rule for every lender's asset sale. This guide isolates that purchase-value working and excludes vehicle-specific notifications and rate analysis. ICAI April 2026 GST bare law: Rule 32(5) and its repossession proviso.
Obtain the borrower's original purchase evidence
Retain the purchase invoice, asset identity, borrower registration status and repossession documents. A loan statement proves debt movements but does not necessarily prove what the borrower paid for the goods. Distinguish purchase price, outstanding principal, interest, recovery expenses and expected sale proceeds. The rule's deemed-purchase formula should not start with whichever one produces the smallest margin. ICAI April 2026 GST bare law: Rule 32(5) and its repossession proviso.
Carry the quarter count through disposal
The specified interval ends at disposal, not repossession. Retain the purchase, repossession and disposal dates in separate fields and show the quarter-count method. Any part of a quarter counts; the worked dates below begin on 1 April so the illustrated three-month blocks align, avoiding a disputed off-cycle quarter convention. Review unusual intervals and unsupported dates rather than substituting a rounded number of years. The examples deliberately stay within short periods and do not resolve a reduction exceeding 100%. ICAI April 2026 GST bare law: Rule 32(5) and its repossession proviso.
Use a straight percentage-point reduction
Five percentage points per counted quarter operates against the original borrower purchase-price base. Do not apply 5% repeatedly to the reducing balance or substitute book depreciation. The formula in these models is original purchase price multiplied by one minus 5% times the quarter count. Reconcile the resulting deemed purchase value to the qualifying selling-price difference. Costs of repairs, custody or recovery are not automatically additional reductions of that statutory difference merely because they reduce commercial profit. ICAI April 2026 GST bare law: Rule 32(5) and its repossession proviso.
Preserve the main eligibility and negative-margin controls
Rule 32(5) concerns used goods dealt in as such or after minor processing that does not change their nature, with no purchase ITC availed. Confirm the actual supplier and transaction qualify rather than relying on repossession alone. A negative selling-price/purchase-price difference is ignored under the rule; do not use one separately supplied loss item to wipe out another's positive margin. Resolve invoice and tax-inclusive-price issues under their own requirements rather than assuming all gross proceeds are exclusive of GST. ICAI April 2026 GST bare law: Rule 32(5) and its repossession proviso.
Keep valuation separate from tax rate and recovery accounting
This article calculates only the taxable-value model using stated GST-exclusive sale amounts. Actual classification, rate, place of supply and any vehicle-specific treatment require current source checks for the goods sold. Reconcile disposal cash against loan recovery separately; a debt shortfall can coexist with a positive GST margin because the two calculations use different bases. Retain each asset's evidence and quarter working with the sale documentation. ICAI April 2026 GST bare law: Rule 32(5) and its repossession proviso.
Applicable primary references
ICAI April 2026 GST bare law: Rule 32(5) and its repossession proviso
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: One part-quarter
An eligible non-vehicle item cost the unregistered borrower ₹10 lakh on 1 April 2026 and is disposed of on 15 May 2026. One counted quarter gives a 5% reduction, deemed purchase value ₹9.50 lakh. At an assumed GST-exclusive sale price of ₹11 lakh, margin is ₹1.50 lakh.
Illustrative example 2: Two quarters and linear reduction
Purchase cost is ₹10 lakh on 1 April 2026; disposal is 15 August 2026. Two counted quarters give 10% reduction and ₹9 lakh deemed purchase value. At ₹10 lakh sale price the margin is ₹1 lakh; reducing-balance multiplication would incorrectly give a ₹9.025 lakh base.
Illustrative example 3: Disposal rather than repossession
Goods cost ₹10 lakh on 1 April 2026, are repossessed on 15 May and sold on 15 November 2026. Three counted quarters run through disposal, giving ₹8.50 lakh deemed value. A ₹9 lakh sale gives ₹0.50 lakh margin. Stopping at repossession would wrongly use one quarter.
Illustrative example 4: Four quarters, different purchase cost
Goods cost ₹8 lakh on 1 April 2026 and are sold on 15 January 2027. Four counted quarters give a 20% reduction, or ₹1.60 lakh, leaving ₹6.40 lakh deemed purchase value. Sale for ₹7 lakh produces ₹0.60 lakh margin.
Illustrative example 5: Loan shortfall does not eliminate margin
Assume original purchase cost ₹10 lakh, four counted quarters, an outstanding debt of ₹12 lakh and sale price ₹9 lakh. Deemed purchase value is ₹8 lakh and GST margin ₹1 lakh. The separate debt shortfall is ₹3 lakh; it does not turn the positive margin negative.
Illustrative example 6: Negative margin is ignored
Assume purchase cost ₹10 lakh and two counted quarters, so deemed purchase value is ₹9 lakh. Sale for ₹7 lakh gives a ₹2 lakh negative difference. Rule 32(5) taxable value is zero for that supply, not minus ₹2 lakh to offset another transaction.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify supplier eligibility | Check the actual used-goods dealing and margin conditions. |
| 2 | Verify borrower status | Retain evidence that the defaulting borrower is unregistered. |
| 3 | Verify recovery purpose | Link repossession to the loan or debt recovery. |
| 4 | Identify original goods | Match serial numbers and the borrower's invoice. |
| 5 | Establish purchase price | Keep the borrower purchase base separate from debt. |
| 6 | Retain all relevant dates | Record purchase, repossession and disposal independently. |
| 7 | Compute quarters | Count every relevant quarter or part through disposal. |
| 8 | Apply linear reduction | Use the original base and the percentage-point formula. |
| 9 | Compute supply margin | Apply the negative-difference rule and exclude unsupported extra deductions. |
| 10 | Verify tax separately | Check rate, classification and invoices, then reconcile loan recovery. |
Sixteen practitioner FAQs
1. Does repossession alone prove margin eligibility?
No. Establish the rule's actual transaction and supplier conditions.
2. Which borrower status is specified in the proviso?
The defaulting borrower is not registered.
3. What purpose must repossession serve?
Recovery of a loan or debt.
4. Which purchase price begins the formula?
The defaulting borrower's purchase price of the goods.
5. Can outstanding loan principal replace it?
No. Debt and purchase price are different measures.
6. Does the interval end on repossession?
No. The stated interval runs through disposal by the repossessing person.
7. Does a part-quarter matter?
Yes. The proviso includes every quarter or part thereof.
8. Is this reducing-balance depreciation?
No. Use percentage-point reductions against the original base.
9. Can book depreciation substitute for the formula?
Not merely because it is available in the accounts.
10. Do the models address periods exceeding twenty quarters?
No. They deliberately exclude the resulting over-100% issue, which requires separate analysis.
11. Can recovery expenses automatically reduce the margin?
They are not extra purchase-price deductions merely because they are business expenses.
12. What happens to a negative supply difference?
It is ignored for the rule's valuation.
13. Can a loan loss offset a positive GST margin automatically?
No. Reconcile the different bases separately.
14. Do these examples prescribe a GST rate?
No. They isolate valuation and use stated GST-exclusive sale prices.
15. Does this guide settle used-vehicle notification issues?
No. Those require their own current classification and notification analysis.
16. What evidence should travel with each sale?
Borrower purchase proof, status, repossession purpose, dates, quarter working and sale documents.
Conclusion
For qualifying repossessions from unregistered defaulting borrowers, deemed purchase value uses the borrower’s purchase price reduced by five percentage points per quarter or part through disposal.