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Published on:

August 28, 2024

Viraaj Vashishth

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Explore GST

GST on Used Cars

Ever since its inception in 2017, the Goods and Services Tax (GST) has completely changed the face of India’s taxation system. One area in which GST has had a profound impact is the second-hand car market. For both sellers and buyers in this sector, it is crucial to know how GST applies to used cars to understand related tax rates and compliance requirements. This article looks into the complexities of GST on used cars while giving a broad outline of the main components.

GST Applicability on Used Cars

How New Cars Differ from Used Cars Under GST

The new and old automobiles are categorized as per the existing laws under The Central Excise Act, 1944 for excise purposes., The term “used car” refers to a car that was registered once and is now being sold again. Unlike new vehicles which are subject to GST based on showroom price, taxation of used cars is different, usually depending upon the margin by which the seller earns.

Dealers selling second-hand cars fall under “taxable persons” for GST purposes; hence, they must follow all rules pertinent to this particular levy. Under the provisions of GST, any person engaged in buying or selling second-hand motor vehicles either as an individual dealer or large enterprise has to be registered with a threshold limit of turnover beyond which such dealers need not be registered stands at Rs.40 lakh p.a for goods (including cars) in most states.

GST on Various Categories of Pre-owned Vehicles

Various classes of pre-used vehicles attracting GST are private cars, two-wheelers and commercial vehicles. The tax rates differ depending on the engine capacity and the type of fuel consumed necessitating that dealers and buyers must know applicable rates for particular kinds of vehicles.

The margin scheme is one of the most important aspects of GST on used cars. Under this arrangement, GST is only paid on a margin, which denotes the difference between the buying price and the selling price of a used car. This decreases the burden upon used car sellers by reducing the amount in taxes compared to when the full value is taxed. You can also use a profit margin calculator on Swipe.

GST Rates for Used Cars

At first, there was no distinction between new and old cars as far as the high rate of 28% GST plus additional cess depending on vehicle types was concerned with overall tax incidence going up to 43%. However, in response to industry demands and concerns, the Goods & Services Tax Council made significant changes in 2018 which lowered rates for second-hand vehicles. These days, here are some of the current GST rates for used cars:

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Vehicle Type	Engine Capacity	GST Rate	Cess Applicability
Petrol Vehicles	≤ 1200cc	12%	Not Applicable
Diesel Vehicles	≤ 1500cc	12%	Not Applicable
Petrol/Diesel Vehicles	> 1500cc	18%	Not Applicable
Electric Vehicles (EVs)	All Capacities	5%	Not Applicable

Current GST Rates For Used Cars

Furthermore, some vehicles might attract a cess along with the Goods and Services Tax (GST) depending on the type of vehicle and its engine capacity. However, for most cases involving used cars, there is no less applicable which means that the tax liability is lesser than that of new cars.

Comparative Analysis of Pre-GST Taxation System

Previously, second-hand car sales were subjected to VAT (Value Added Tax) and CST (Central Sales Tax), which were different in every state. GST brought uniformity by replacing it with one tax instead of many complicated tariffs. But in 2018 there was a decrease in rates after initially high rates alleviating them and bringing the structure closer to VAT in some states.

Input Tax Credit on Used Cars

ITC, or input tax credit, allows businesses to claim a credit for the tax paid on inputs used in their business operations. However, ITC on used cars is restricted. Although companies can avail of ITC for vehicles sold again to customers; however they cannot claim ITC for vehicles meant for personal use.

Reversal of ITC and Section 17(5)

Therefore, under section 17(5) of the CGST Act, there are cases when you cannot get ITC. For example, if you have bought a car for personal use then the company will not be able to make an input tax credit claim. Used car traders should be careful with such claims as it may lead to penalties or even be disallowed during an audit.

GST on Sale of Old Car with Example

For example, let us say that a dealership buys a used car worth Rs. 500000 and sells it at Rs.600000 thus making a profit of Rs.100000.Goods and Services Tax (GST) is levied only on this profit margin according to the margin scheme as opposed to the entire selling price. If the vehicle had been first owned by someone else and then resold, no input tax credit would have been available under this scheme.

Compliance Requirements for Dealers

1. With its turnover above the threshold limit, a used car dealer must also register with the GST. Small dealers may opt for a Composition Scheme where tax rates are lower but there are restrictions such as not being able to issue tax invoices or claim ITC.

2. Proper documentation is an important aspect of compliance. Tax invoices that indicate the selling price, margin and GST charged must be issued by dealerships. Accurate bookkeeping makes filing GSTR easy as well as reducing discrepancies during audits.

3. Used car dealers are required to complete periodic GST returns, including GSTR-1 (sales information) and GSTR-3B (summary returns). When reporting sales, they will complete the form either monthly or quarterly depending on their turnover threshold. It is necessary to conduct reconciliations between purchases and sales, so that proper GST is paid.

4. Used car dealerships and the GST regulation authority will conduct a compliance audit of an automobile dealer’s business. The audit includes verifying invoices, the calculation of the ITC and margin consequently. Expect questions and maintain all records to avoid penalties, if needed.

Challenges and Problems in the Used Car Market Under GST

1. One key challenge is how to value used cars for GST purposes. The dealer must take into account factors such as depreciation, wear and tear, market demand and others to arrive at a fair valuation. Calculating the correct GST can be done by using standardized ways of valuing.

2. Complex provisions under ITC especially in section 17(5) can confuse dealers. The ambiguity of ITC entitlement for vehicles that may be used for business and personal reasons may lead to errors in tax returns and disagreements with tax authorities - both scenarios lead to increased burden on business owners.

3. The used car trade is dominated by small and unorganized dealers who encounter multiple issues with GST. The compliance burden that encompasses thorough record keeping and required filing of returns, in addition to operational costs, was problematic and limiting before GST and makes it more difficult to compete with organized dealers who tend to be better funded.

4. Some decisions from courts have affected the interpretation of GST provisions relating to used cars but others have guided ITC claims (Venkatramana et al., 2017). Dealers should be updated about these judicial rulings so that they are compliant with the law.

Conclusion

The taxation and regulatory framework for used cars have been transformed by GST. The margin scheme was introduced as well as a reduction of tax rates which went some way to mitigating these obstacles although there are still complexities around ITC provisions and compliance. Such changes are difficult for the unorganized sector in the used car market to quickly adapt to. There may be a further need for reforms in this crucial sector as the GST regime continues to evolve.

FAQs

1. Does GST apply to all vehicle types?

Yes, GST on used cars applies to all classes of vehicles like personal vehicles, two-wheelers and commercial vehicles depending upon their engine capacity.

2. What is the rate levied on GST on sale of used cars?

For example, the government charges 12% - 18% based on both engine size & type (eg: petrol or diesel). In addition, electric vehicles attract a lower charge of just 5%.

3. Is GST applicable on sale of used cars by company?

Yes, there is GST in respect of the sale of old vehicles by a corporate entity/company. Normally, GST would be assessed only on the difference between the selling price and the purchase price.

4. How does the GST on sale of used cars affect their prices?

The final selling price for a used car is affected by GST on the sale adding a tax component commensurate with its classification as well. However, the Margin scheme under GST reduces the overall tax incidence on dealers of used cars.

5. What is the used car GST rate in respect of vehicles over 1500cc?

The GST rate for used vehicles which have more than 1500cc engine capacity is 18% be it petrol or diesel-powered.

6. Does GST apply to unregistered dealers selling second-hand cars?

All second-hand car dealers including unregistered ones are required to charge Goods and Services Tax (GST) provided they make annual revenue above a specific limit thus necessitating them to register under GST.

7. What is the GST on sale of used car notification from the GST Council Meet?

In 2018, a notification issued by the GST council reduced the rates of goods and services tax for pre-owned vehicles to either twelve per cent or eighteen percent depending upon the type of vehicle from twenty-eight per cent that was in existence earlier.

8. Is Input Tax Credit (ITC) available for the purchase of second-hand cars?

Regarding the acquisition of used cars, ITC can be demanded only on those purchased for business use or resale but not for domestic purposes. However, there must be a limitation placed as stated in Section 17(5) of the CGST Act.

9. What is the effect of the margin scheme on GST on the sale of used motor vehicles?

Under the margin scheme, GST is charged on the difference between the selling price and the purchase price of used motor vehicles thereby minimizing the tax burden that dealers have to bear.