Here’s an overview of the GST Council’s recommendation and the tax that will need to pay when selling used cars.
On Tuesday, government sources said that the GST Council has not recommended the imposition of any new tax for old and used vehicles in the recent meeting. The experts clarified that the GST Council has simplified the tax rate and recommended unifying and prescribing a single rate of GST on the sale of all old and used vehicles including EVs at 18%.
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In the past, the GST on old and used vehicles was levied at different rates. However, the GST Council has now decided to prescribe a single rate of 18% on the sale of all old and used vehicles, including Electric Vehicles (EVs).
If an individual sells an old and used car to another individual (i.e., a private sale), GST will not apply.
For registered persons who have claimed depreciation under Section 32 of the Income Tax Act, 1961, GST will be payable only on the margin. The margin is defined as the difference between the consideration (selling price) received for the vehicle and its depreciated value on the date of sale.
This update clarifies the tax treatment for the sale of used vehicles and streamlines the process for both buyers and sellers.
“Where such margin is negative, no GST is payable,” a source said.
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For example, if a registered person is selling an old and used vehicle to any person at Rs 10 lakh, where the purchase price of the vehicle was Rs 20 lakh and has claimed depreciation of Rs 8 lakh on the same under Income Tax Act, then he is not required to pay any GST as the margin of the supplier, that is differential value of the selling price (Rs 10 lakh) and the depreciated value which is Rs 12 lakhs, is negative.
In case the depreciated value in the above example remains the same at Rs 12 lakh and the selling price is Rs 15 lakh, GST will be payable on the margin of the supplier i.e on Rs 3 lakh at the rate of 18 per cent.
In any other cases, GST is payable only on the value that represents the margin of the supplier i.e. the difference between selling price and the purchase price. Again, where such margin is negative, no GST is payable.
For example, if a registered person is selling an old and used vehicle to any person at Rs 10 lakh, where the purchase price of the vehicle by the registered person was Rs 12 lakh, then he is not required to pay any GST as the margin of the supplier is negative in this case.
In cases where the purchase price of the vehicle was Rs 20 lakh and the selling price is Rs 22 lakh, GST of 18 per cent will be payable on the margin of supplier, that is, Rs 2 lakh.
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EY Tax Partner Saurabh Agarwal said the GST Council has recommended increasing the GST rate on old and used EVs and small fossil fuel cars from 12 per cent to 18 per cent, aligning it with the rate for larger cars and SUVs.
It’s important to note that GST on second hand vehicles will be applied only on margins and not on sale value of vehicles (sale value less income tax depreciated cost of vehicle or purchase price, as the case may be).
Prior to the proposed amendment, GST on second hand EVs was applicable on the complete sale value of the vehicle.
“Therefore, the proposed change should not be looked as a deterrent for second hand EVs. This should in turn be a welcome step as it would likely bring down the cost for second hand EVs (till the time margins earned are less than 27.78 per cent of the purchase price). At best, it will increase the cost of second hand small fossil fuel cars by 0.6-1.5 per cent (assuming margins would range for 10-25 per cent of purchase price),” Agarwal said.
This proposal appears to be in line with the vision of the government where they want to restrict pollution levels arising due to rapidly growing second hand car market, he added.
AMRG & Associates Senior Partner Rajat Mohan said for EVs, which already benefit from government incentives to promote their adoption, the hike in GST on resale could slightly deter cost-sensitive buyers, potentially impacting the overall EV penetration in secondary markets.
“Dealers will now need to maintain impeccable records of transactions to comply with these changes effectively. While this revision boosts revenue potential for the government, it demands adaptability from businesses and awareness among consumers regarding the net impact on resale pricing,” Mohan added.
