In the recent 55th GST Council meeting held on Saturday, December 21, 2024, Finance Minister Nirmala Sitharaman proposed a significant change—a uniform 18% GST rate on the sale of old and used vehicles, replacing the earlier rates that ranged from 5% to 28%. This move aims to simplify the tax structure for GST-registered dealers while addressing common misconceptions surrounding its application.
For instance, claims such as “paying tax on losses” have caused confusion among buyers and sellers. In reality, GST is levied only on the profit margin and not on losses, ensuring fairness for all stakeholders.
This guide will clarify how this updated tax rate impacts dealers, buyers, and the used car market while addressing common scenarios, key takeaways, and the historical evolution of GST on used cars.
Table of Contents
What Is GST on Used Cars?
The GST on used cars in India has recently been revised to a uniform 18% rate for all types of used vehicles, as announced by the GST Council on December 21, 2024. This new rate replaces the previous range of 5% to 28%, which varied based on the type and age of the vehicle.
Under the new GST structure, GST is applied to the profit margin earned by GST-registered dealers and when selling old or pre-owned vehicles, rather than the full value of the vehicle. This means that only the difference between the selling price and the purchase price (the margin) is taxed, not the entire vehicle cost.
The new GST rate on the sale of used cars applies exclusively to businesses or platforms registered under GST, such as car dealerships and online platforms like Cars24 and Spinny. Private transactions between individuals, however, remain exempt from GST.
Related Read: GST Rates on Cars
Misconception: “Tax on Losses”
There has been widespread confusion suggesting that GST is charged on losses incurred during the sale of used cars. This is incorrect. GST on sale of car is calculated only on the profit margin, which is the difference between the selling price and the depreciated value of the vehicle.
Example of GST Calculation on Used Cars
Let’s break down how GST is calculated on the profit margin for used cars with the following examples:
Example 1: When Selling Used Car at a Loss
- Purchase price: ₹10 lakh
- Selling price: ₹8 lakh
- Margin: ₹8 lakh – ₹10 lakh = (-₹2 lakh)
Since the margin is negative, meaning the seller is selling the car at a loss, no GST is applicable.
Example 2: When Selling Used Car at a Profit
- Purchase price: ₹8 lakh
- Selling price: ₹10 lakh
- Margin: ₹10 lakh – ₹8 lakh = ₹2 lakh
In this case, the seller is making a profit of ₹2 lakh, so 18% GST is charged on the profit margin.
- GST on ₹2 lakh profit: ₹2 lakh * 18% = ₹36,000
Thus, the GST to be paid on the ₹2 lakh profit is ₹36,000.
Who Does the 18% GST on Used Cars Apply To?
The 18% GST rate on used cars applies specifically to GST-registered dealers who are involved in the business of buying and selling old or pre-owned vehicles. These dealers include organized platforms like Cars24, Spinny, and other car dealerships operating within the GST framework.
Key Points to Note on GST on sale of car:
1. Business-to-Consumer (B2C) Transactions
If you purchase a used car from a GST-registered dealer, the 18% GST is factored into the final price. This tax is levied only on the profit margin, not on the entire sale price.
2. Private Sales
Transactions between private individuals—such as selling your car directly to another person—are exempt from GST, as these do not fall under the purview of business activities or GST regulations.
3. Examples for Clarity
-
- GST Applies:
A dealer purchases a car for ₹5 lakh and sells it for ₹6 lakh. Here, the profit margin is ₹1 lakh, and 18% GST applies only to this ₹1 lakh profit. - No GST:
An individual sells their car directly to another individual for ₹6 lakh. This private sale is GST-free.
- GST Applies:
Impact on Buyers and Sellers
1. Impact on Buyers
1.1 Potential Price Increase:
For buyers purchasing used cars from GST-registered dealers, the 18% GST on the profit margin may result in slightly higher prices. Dealers often incorporate this tax into the final bill, indirectly passing the cost to the buyers.
Example:
- A dealer purchases a car for ₹10 lakh and sells it for ₹11 lakh. The profit margin is ₹1 lakh, and an 18% GST (₹18,000) is charged on this amount.
- The buyer’s final price includes the dealer’s profit and the applicable GST, potentially increasing the overall cost.
1.2 Better Clarity in Pricing:
Transactions with GST-registered dealers provide detailed invoices, ensuring buyers are aware of the tax component. This can be beneficial for transparency in costs.
2. Impact on Private Sales
2.1 No GST on Private Transactions:
Individual-to-individual sales, such as selling a car directly to another person, are exempt from the 18% GST. This is because private sales are not commercial transactions and fall outside the GST framework.
Example:
- If you sell your car to a friend for ₹8 lakh, no GST is applicable, and the transaction remains tax-free.
2.2 Competitive Pricing Advantage:
Private sales may appear more cost-effective to buyers due to the absence of GST. However, these transactions lack the formalities and guarantees often provided by GST-registered dealers, such as quality checks or warranties.
Is the 18% GST on Used Cars a New Tax?
Not a New Tax, Just a Revised Rate
No, the 18% GST on used cars is not a new tax. It is part of the Margin Scheme under Rule 32(5) of the CGST Rules, 2017, which applies to all second-hand goods, not just vehicles. This rule ensures that GST is charged only on the profit margin of the sale, not on losses or the total sale value.
Previously, some used cars were taxed at a lower GST rate, typically 12%. However, the latest change in the GST Council meeting on December 21 introduced a uniform 18% GST rate for used vehicles sold by GST-registered dealers.
Revised Rates for Specific Vehicle Categories
The new 18% GST rate applies to the following vehicle categories:
- Electric Vehicles (EVs)
- Petrol vehicles with an engine capacity of 1200 cc or more and a length exceeding 4000 mm
- Diesel vehicles with an engine capacity of 1500 cc or more and a length exceeding 4000 mm
- SUVs
These updates aim to simplify the tax structure and ensure consistent application across various vehicle types.
How the Margin Scheme Works?
Under the Margin Scheme:
- GST is calculated only on the dealer’s profit margin.
- No GST is payable if the margin is negative (i.e., if the selling price is less than the depreciated value or purchase price).
Example:
- A dealer buys a used car for ₹10 lakh and sells it for ₹12 lakh. GST at 18% is applied only on the ₹2 lakh profit margin.
- If the selling price is ₹9 lakh, resulting in a ₹1 lakh loss, no GST is charged.
This clarification dispels misconceptions about “taxing losses” and highlights the fairness of the Margin Scheme for used goods.
FAQs
1. Is GST on used cars applicable to private sales?
No, GST on used cars applies only to sales made by GST-registered dealers. Transactions between individuals in private sales are exempt from GST.
2. Do I need to pay GST if I sell my car at a loss?
No, GST is charged only on the profit margin under the Margin Scheme. If you sell your car for less than its purchase price or depreciated value, no GST is applicable.
3. Does the 18% GST rate apply to all used cars?
Yes, the 18% GST rate applies uniformly to all used cars sold by GST-registered dealers. However, private sales and vehicles sold by unregistered sellers are excluded.
4. How is GST calculated under the Margin Scheme?
GST is calculated on the profit margin (the difference between the purchase price and the selling price). If the margin is negative, no GST is charged.
5. Are electric vehicles (EVs) included in the 18% GST category?
Yes, electric vehicles (EVs), along with petrol and diesel vehicles meeting certain engine capacity and length criteria, are taxed at 18% when sold as used cars by GST-registered dealers.
6. Will buyers face higher prices due to the revised GST rate?
Yes, buyers may see a slight price increase when purchasing used cars from GST-registered dealers due to the revised 18% GST rate, which is now uniformly applied.
