With a complex taxation system, the Goods and Services Tax (GST) has simplified India’s taxation system, including the automobile industry. Amendments to the sale of second-hand vehicles are among the most significant changes. Prior to the GST, used cars were subject to a number of taxes, including VAT, excise duty, and service tax. Taxation on used and pre-owned vehicles has been streamlined and made open under the new regime.
When intending to sell or buy a used car in India, it is essential to understand how GST on second-hand cars works in India, including the applicable rates and exemptions.
What is GST on the Sale of Second-Hand Vehicles?
The second-hand vehicle GST is the tax imposed when a second-hand or pre-owned motorcar, motorbike, or commercial vehicle is sold. The GST Council introduced this system as a means of controlling the resale of vehicles and promoting fair play by preventing double taxation.
As compared to new cars, the second-hand vehicles are not charged the same tax since GST has already been paid once during the first sale. The government has implemented special rules and exemptions for resale transactions to prevent excessive taxation.
Applicability of GST on Sale of Used Vehicles
Sale by Registered Dealers
When a dealer or company registered sells a second-hand vehicle, GST is to be paid at special rates. The dealer has to abide by the GST regulations and is allowed to use the margin scheme to value.
Sale by Individuals
GST is not paid when one sells his or her personal vehicle or bike. This is due to the fact that the sale is not regarded as a business transaction. The sales of individuals are not subject to GST.
GST on Sale of Second-Hand Vehicles
In 2018, the GST council cut the taxes on used cars to encourage the resale market. The following are the existing GST rates of second-hand vehicles:
- GST 18 percent of used vehicles that have engines above than 1200 cc (petrol) or 1500 cc (diesel).
- GST of 12 percent on smaller vehicles and electric cars.
- Nil GST where the seller had paid GST on the purchase and failed to claim the Input Tax Credit (ITC) at the time of purchase.
Also, Compensation Cess does not apply in the sale of second-hand cars, which makes used cars cheap to consumers.
GST Valuation of Second-Hand Vehicles
The margin scheme is used to calculate the value on which GST is charged on second-hand vehicles. Under this approach, GST is only charged on the profit margin accrued by the dealer or seller.
Formula:
Taxable Value = Selling Price-Purchase Price.
When the price at which it is being sold is the same as or less than the price of purchase, then no GST is being paid. This is to make sure that taxes are imposed on the real profit made.
Example:
A car dealer purchases a vehicle at a price of Rs.8, 00,000 and sells it at a price of Rs. 8,50,000. The margin is Rs.50,000. It is charged on Rs.50,000 only and not the gross sale value.
Conditions for Using the Margin Scheme
The margin scheme may be applied on the condition that:
- The dealer has failed to claim Input Tax Credit (ITC) in respect of the vehicle.
- The car is marketed in its natural condition without any significant alterations.
- The seller is in the business of selling and purchasing second-hand cars.
In case the vehicle has been reconditioned, altered or upgraded prior to resale, the GST is paid on the cumulative transaction cost and not the margin.
GST Exemption on Second-hand Vehicles
There are some transactions which are free of GST under certain circumstances.
- Exception 1: Sale of an individual of his or her personal vehicle (not business use).
- Exemption 2: Sale by the company who has paid the GST on the vehicle already, but has not claimed ITC.
- Exemption 3: Sale to a registered used car dealer, and he resells using the margin scheme.
These exemptions were brought about to ensure that the pre-owned car marketplace is priced lower and to prevent taxation twice.
GST on Sale of Vehicles that belong to a Company
GST is applicable to the sales of old or depreciated vehicles by a company based on the ITC status.
- In case of claiming ITC when acquiring the vehicle, GST is payable at the time of sale.
- In the event that no ITC was claimed, the sale is exempt in Notification No. 8/2018 – Central Tax (Rate).
An example is that when an old staff car is sold by a company, the sale was made prior to the GST or ITC, then the sale will not be subject to the GST.
Registration of GST for Used Car Dealers
Companies that engage in selling and buying second-hand cars have to be registered under GST, provided their turnover has surpassed the suspension level of Rs.20 lakh (Rs.40 lakh in certain states).
Dealers must maintain:
- Purchase and sale invoices.
- Customer and vehicle sales information.
- Computation of tax based on the margin scheme.
Compliance is also achieved through proper documentation, and the risk of disagreements during audits is minimised.
Effects of GST on the Used Car Market
The used automobile business in India has been positively influenced by the GST regime. In the past, several taxes, such as VAT and excise, have rendered resale transactions costly and complex.
Now, under GST:
- Its taxation rate is reduced particularly on small and mid-sized cars.
- The margin scheme makes sure the payment of taxes used on profits and not the value of total.
- The removal of Compensation Cess has made the prices lower for the buyers.
Consequently, the structured used car market has evolved very fast, and online dealerships and authorised dealerships have been proliferating across the country. The open taxation system has enhanced the buyer’s confidence and increased the resale value of vehicles.
Summarised Provisions for GST on Sale of Second-Hand Vehicles
| SR. NO. | PARTICULARS | HSN | CRITERIA | VALUATION | APPLICABILITY OF GST |
| 1 | Second-hand vehicle sold prior to 25.01.2018 | 8703 | ITC availed either under the earlier Indirect Tax Laws or the GST Law | Sales Consideration | GST rate shall be for a New Motor Vehicle |
| 2 | Second-hand vehicle sold post 25.01.2018 | 8703 | ITC is not availed either under the earlier Indirect Tax Laws or the GST Law | Margin of Supply | GST rate shall be of 18%/12% as given above. |
| 3 | Second-hand vehicle sold prior to 25.01.2018 | 87 | ITC availed either under the earlier Indirect Tax Laws or the GST Law | Sale Consideration | GST rate shall be for a New Motor Vehicle |
| 4 | Second-hand vehicle sold post 25.01.2018 | 87 | ITC was not availed either under the earlier Indirect Tax Laws or the GST Law | Margin of Supply | GST rate shall be 18%/12% as given above. |
Conclusion
Understanding GST on the sale of second-hand vehicles is crucial for dealers and those involved in resale transactions. The used car business in India has experienced growth due to the simplified tax system, reduced GST rates, and fair valuation techniques.
When buying or selling a second-hand car, ensure that the dealer is compliant with GST and uses the margin scheme properly. To businesses, it is essential to maintain accurate records and registration to avoid penalties.
To summarise, GST has ensured that the buying and selling of second-hand vehicles are more transparent, affordable, and business-friendly, thereby creating a win-win situation for both buyers and sellers of second-hand vehicles in India.
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