The sale of used cars in India has undergone a significant change in GST applicability. The GST Council’s latest decision clarifies that GST on used cars applies only if the sale price exceeds the depreciated cost value, aligning taxation with actual margins. This move simplifies tax computation while ensuring fairness in the second-hand car market.
Key Highlights of GST on Used Cars
- GST Rate & Applicability
- GST is applicable at 18% on the margin earned by registered sellers.
- Margin = Sale Price – Depreciated Cost (as per Section 32 of the Income Tax Act).
- No GST for Negative Margins
- If the depreciated value exceeds the selling price, no GST is payable.
- Example:
- Purchase Price: ₹20 lakh
- Depreciated Value: ₹12 lakh
- Sale Price: ₹10 lakh
Since the margin is negative (₹10 lakh – ₹12 lakh = -₹2 lakh), GST is not applicable.
- Exemption for Individuals
- GST does not apply when a vehicle is sold between individuals who are not registered under GST.
- Revised GST Rates for EVs and Fossil Fuel Cars
- The GST rate for old and used electric vehicles (EVs) and small fossil-fuel cars has been raised from 12% to 18%, aligning it with larger vehicles.
- GST is still levied only on the margin, reducing the tax burden compared to earlier rules where the full sale value was taxed.
- Impact on Buyers and Dealers
- For Buyers: The revised structure can marginally increase the cost of used fossil-fuel cars by 0.6%–1.5%, depending on margins. EV buyers may face slightly higher costs but benefit from reduced taxation on margins instead of the full sale value.
- For Dealers: Accurate record-keeping is now critical to ensure compliance and avoid penalties.
Detailed Case Analysis
- Scenario 1: Selling Below Depreciated Value
- Purchase Price: ₹12 lakh
- Depreciated Value: ₹8 lakh
- Sale Price: ₹10 lakh
- Margin: ₹10 lakh – ₹8 lakh = ₹2 lakh
- GST: ₹2 lakh × 18% = ₹36,000
- Scenario 2: Selling Above Depreciated Value
- Purchase Price: ₹20 lakh
- Depreciated Value: ₹12 lakh
- Sale Price: ₹15 lakh
- Margin: ₹15 lakh – ₹12 lakh = ₹3 lakh
- GST: ₹3 lakh × 18% = ₹54,000
- Scenario 3: Negative Margin
- Purchase Price: ₹20 lakh
- Depreciated Value: ₹12 lakh
- Sale Price: ₹10 lakh
- Margin: ₹10 lakh – ₹12 lakh = -₹2 lakh
- GST: Not Applicable
Impact on Second-Hand Car Market
The GST Council’s decision supports a more transparent taxation model, fostering growth in the used car market. By taxing only actual profits, the policy reduces financial burdens on sellers while addressing environmental concerns by incentivising EVs over fossil-fuel cars.
Conclusion
The revised GST framework for used cars balances revenue generation with market accessibility. Understanding the margin-based taxation system ensures compliance and transparency for registered sellers and dealers, while offering buyers cost predictability.