GST on used cars is based on the taxable event called as supply. The definition of supply under includes all kinds of sale, exchange, transfer, barter, lease, rental, license and disposal undertaken for the furtherance of business consideration. Thus, the two important elements of supply are:
- Consideration
- Furtherance of business
A transaction is not considered a sale if the above two elements are not satisfied.
The sale of old cars or used cars (resale of cars) is considered taxable under GST. It is pertinent to note that if such private resale happens between two individuals, then it is exempt from GST (not taxable).
GST on Sale of Old Cars
The sale of used cars is subject to GST, but the tax application differs from that of new cars. For new cars, GST is charged at the full sale price at the point of sale. However, in the case of used cars, GST is primarily governed by the margin scheme, which applies the tax to the profit or margin the seller makes from the sale rather than the full sale price.
GST rules for used cars
- Margin Scheme: Under the margin scheme, GST is charged only on the difference between the purchase price and the sale price of the used car. This means the tax applies only to the profit margin (difference), not to the entire sale price of the car.
- Input Tax Credit (ITC): ITC is not applicable in the case of used cars under the margin scheme. Typically, businesses can claim a credit for the GST paid on inputs, but when selling used cars, the seller cannot claim any input tax credit on the purchase of the vehicle.
- GST Rates on Used Cars: The GST Council has decided to apply a uniform 18% GST on all used vehicles, simplifying the tax structure that previously ranged from 5% to 28%.
Applicability of GST on the Sale of Old Cars
| Usage by seller | Is the seller registered? | Is the buyer registered? | Applicability of GST |
|---|---|---|---|
| Business | No | No | No |
| Business | No | Yes | No (Kept out of the notified list of goods/services subject to reverse charge under Section 9(4) of the CGST Act) |
| Business | Yes | No | Yes |
| Personal | No | No | No |
| Car Dealer | Yes | No | Yes |
| Auction by Registered Dealer | Yes | Yes | Yes |
| Auction by Unregistered Seller | No | NA | No |
| Sale to Exporter | NA | NA | No, if exported |
GST Rates and HSN Codes for Used Cars
| Description | HSN code | GST | Compensation cess |
|---|---|---|---|
| LPG/ CNG vehicles with engine capacity not exceeding 1200cc and length not exceeding 4000mm | 8703 | 18% | 1% |
| Diesel vehicles having engine capacity not greater than 1500cc and length not greater than 4000mm | 8703 | 18% | 3% |
| Engine capacity greater than 1500cc | 8703 | If the seller did not claim ITC: 18% If the seller has claimed ITC: 28% | 20% |
| SUVs (Engine capacity greater than 1500cc) | 8703 | If the seller did not claim ITC: 18% If the seller has claimed ITC: 28% | 22% |
| Electric vehicles (both two and three-wheeled) | 8703 | 5% | Nil |
Input tax credit claims
If a dealer purchased a used car from another registered dealer, then GST is collected and paid by the selling dealer. Thus, the GST paid by the purchasing dealer can be claimed as input tax credit as per normal ITC rules.
However, section 17(5) disallows ITC on certain motor vehicles. As per this section, ITC is unavailable on vehicles used for transportation of persons with a seating capacity less than or equal to 13 persons, including the driver. Input tax credit (ITC) can be claimed only if the motor vehicles are used by the business making taxable supplies in the below scenarios-
- Further supply of such motor vehicles or
- Transportation of passengers or
- Imparting training on driving such motor vehicles
Notes:
- Car given to employees for business use: ITC cannot be claimed on motor vehicles given to employees used whether or not used for business.
- Demo cars: Demo cars are not purchased by the car dealers for resale. Thus, they can be treated as capital assets, and ITC can be claimed.
- Renting a car: ITC can be claimed for the renting of motor vehicles with a seating capacity greater than 13 persons as per section 17(5) and not anything smaller. Thus, the employer can claim ITC on GST charged by the service provider if the seating capacity is greater than 13 persons.
- Transport business: If an entity is purchasing cars for transportation of passengers, then it can claim ITC on such vehicles.
FAQs
Q1. How to calculate GST on a used car?
Taxpayer can calculate GST on a used car by multiplying the GST rate to the profit margin (selling price(-) purchase value).
Q2. What is the value of supply on which GST is applied?
The value of supply is the difference between the sale and the purchase price:
-Depreciation is availed: The margin of supply is the gap between the sale price and the depreciated value of the car as on the date of supply. If such value is negative, then it is to be ignored.
-Other cases: It is the difference between the selling price and the purchase price, and if the same is negative, it shall be ignored.
Q3. Is GST applicable on the sale of used cars?
Yes, GST is applicable on the sale of used cars. The rate depends on whether the car is sold by a registered person or a non-registered person. When sold by a registered person, the GST rate on sale of used car is generally 18%, but there are specific conditions for this.
Q4. Are there different GST rates for used car sale and electric vehicles?
Yes, the GST rate on electric vehicles (EVs) sold as used cars is lower than that for conventional used cars. The GST rate for used electric vehicles is 5%, as per the current tax rules.
Q5. Is GST applicable on the sale of used cars by a registered person?
Yes, GST is applicable on the sale of used cars by a registered person. The GST rate on sale of used car can be 18%, but if the margin scheme applies, it is calculated on the margin instead of the full sale price.
Q6. Are there any special rules for GST on the sale of second-hand cars?
Yes, second-hand car GST rules are specifically designed to minimize tax burden for dealers and individuals. These rules focus on the margin scheme, where GST is applicable only to the profit margin made on the sale instead of the entire value of the car.
Q7. What is the GST on the sale of a used car for business purposes?
The GST rate remains 18%, calculated on the profit margin for business transactions.
Q8. What is the GST rate on the sale of a used car by a company?
GST on the sale of used cars by a company is subject to the same rates as other sales, which is generally 18%. However, if the car was used for business purposes and the company has already claimed input tax credit, the sale may be taxed differently under the margin scheme.
