Brief Background
GST on sale of old /used vehicles were taxed at the same rate as applicable on new vehicles which was 28% + applicable cess levied vide notification No 1/2017-Central Tax (Rate) dated 28.06.2017 and due to this, effective tax on sale of old vehicles was upto 43%. This higher rate of tax was causing the burden on trade and industry. Hence to make old/used Motor Vehicle more affordable to all, the Central Government on the recommendation of the GST Council, had issued the Notification No 8/2018-Central Tax Rate dated 25th January 2018.
Relevant Statutory Provisions
As per Notification No 8/2018- Central Tax Rate dated 25.01.2018, w.e.f 25th January 2018 GST rates on sale of used/old motor vehicle has been rationalized by the Central Government to boost the automobile sector.
The synopsis of the above mentioned notifications is mentioned hereunder; –
| Sl.No | HSN Code | Description of Goods | ITC conditions | Tax rate (Central + state) |
| 1 | 8703 | Old and used, (LPG) or (CNG) driven motor vehicles having engine capacity of 1200 cc or more and of length of 4000 mm or more. | ITC not availed in earlier laws or under GST law | 18% |
| 2 | 8703 | Old and used, diesel driven motor vehicles of engine capacity of 1500 cc or more and of length of 4000 mm | ITC not availed in earlier laws or under GST law | 18% |
| 3 | 8703 | Old and used motor vehicles of engine capacity exceeding 1500 cc, as Sports Utility Vehicles (SUVs) including utility vehicles. | ITC not availed in earlier laws or under GST law | 18% |
| 4 | 87 | Any other old/used vehicles | ITC not availed in earlier laws or under GST law | 12% |
Further vide Notification No. 1/2018 – Compensation Cess (Rate) the Government had also exempted the cess on sale of old/used Motor Vehicles.
Issue involved
Whether concessional rate of tax on old/used motor vehicle as defined under NN 8/2018-Central Tax Rate dated 25.01.2018 is available on sale of motor vehicle registered for test drive/demo purpose?
Our Analysis
As per Section 9 tax shall be levied on the supply of goods or services or both on the value determined under section 15 at such rate as notified by the Central Government.
On a plain reading of section 15(1) of the CGST Act 2017, it provides that value of supply of goods or services or both shall be the transaction value i.e. the price actually paid or payable, when the supplier and recipient are not related and price is the sole consideration for the supply. Tax shall be levied on the amount of consideration received form the recipient for the supply of goods or services or both subject to certain inclusions as specified in section 15 (2) of the CGST Act 2017
The rate of tax which is to be levied on the supply of goods or services are to be notified by the Central Government and in this respect the concessional rate of tax under the afore mentioned notification has been made available only on sale of used/old motor vehicle. Hence the term old/used motor vehicle is very significant to understand.
However, the term old/used motor vehicle has neither being defined in the said notification nor in the Motor Vehicle Act 1988, for understanding of the tax payer. Hence reference has to be made to the definition used in the common parlance.
1. Definition of Old/used as per the prominent Dictionaries and regulations
As per Collins dictionary “used or second hand things” are not new and have been owned by someone else.
As per Collins dictionary “used” means previously owned and used or not from the original source or experience.
As per Cambridge dictionary “used to” shows that a particular thing always happened or was true in the past, especially if it no longer happens or is no longer true.
As per section 2(30) of the Motor Vehicle Act 1988 “owner” means a person in whose name a motor vehicle stands registered…. Hence upon registering the motor vehicle in its own name by the dealer it becomes a first-hand owner.
Giving reference to the term “old/used” in the Collins dictionary and Cambridge dictionary as mentioned above any goods which has been owned and used by the existing person will qualify the term as old/used motor vehicle. As once the car is registered and used for test drive it had already borne some wear and tear of its tyres and other mechanical parts which doesn’t qualify it to be a brand new motor vehicle and is also counted for depreciation under the Companies Act 2013.
2. Mandatory requirement of registration of Motor Vehicle under the Motor Vehicle Act ,1988
According to Section 39 of The Motor Vehicles Act, 1988, “…no person can drive in a public place or in any other place, unless the vehicle is registered in accordance to this Act and the certificate of registration of the vehicle has not been suspended or cancelled and the vehicle carries a registration mark displayed in the prescribed manner…”
Hence the motor vehicle cannot be used for test drive by the customer unless the said vehicle has been registered in the name of dealer. Therefore, the preliminary condition to drive a motor vehicle on road even for demonstration or test drive purpose is to get the vehicle registered with the concerned Regional Transport Office (RTO).
Also one can give an argument that when this motor vehicle is further sold to the customer by the dealer the consideration charged would be a little less as compared to the other motor vehicles, the reason being this car has been used many times before its final purchase by the customer.
3. Similar Judgement in support of the case
To avail concessional rate of tax the vehicle must qualify the scope of old and used vehicle. In this regard similar judgement was issued in the case of Kaliyappan VS Intelligence Officer Kerela High Court 2012 W.P.C No 31325 of 2012.
In which the Hon’ble High Court gave reference to the proviso to section 6(1) and section 2(IiiA) of the Kerela VAT Act,2003 and held that the particular vehicle satisfies the definition of old and used vehicle and are eligible for concessional rate of VAT at 0.5% instead of 13.5 % charged for normal sale of goods.
The relevant provisions of the said Act have been iterated below for reference.
“……Section 6- Levy of tax on sale or purchase of goods.
Provided also that the rate of tax on the sale of used motor vehicles shall be at 0.5 per cent and that no tax is payable under sub-section (2) …”
“…. Section 2(IiiA) defines “Used Motor vehicle” as a motor vehicle purchased and registered under the provisions of the Motor Vehicles Act, 1988 (Central Act 59 of 1988) and used for a minimum period of fifteen months subsequent to the registration or which had already been subjected to tax under this Act…”
4. FAQ in support of the facts of the case
Further, as per the FAQ related to supply of old and used cars issued by CBIC the below mentioned question was discussed.
“…Whether a car dealer can avail the concessional rate benefit for demo cars?
Ans: The Demo car is used for the purpose of test drive and sold at a later date. It could be considered as “used/old car”. Therefore, the dealer can avail the rate benefits which are applicable for the supply of old and used cars, subject to conditions mentioned therein…”
Conclusion
Finally, in the light of the aforementioned judgement and the FAQ it becomes conclusive that the sale of motor vehicle used even for test drive/demonstration purpose qualifies the definition of old and used vehicle and hence concessional rate of GST can be availed as per Notification No 8/2018-CT (Rate) w.e.f 25th January 2018.
Standard Caveat
Our conclusions are based on the completeness and accuracy of the above-stated facts and assumptions. If any of the foregoing is not entirely complete or accurate, it is imperative that we are informed immediately, as the inaccuracy or incompleteness could have a material effect on our conclusions. We are relying upon the relevant provisions of the Integrated, Central, State Goods and Services Tax Act, 2017, Value Added Tax Act as amended, the notifications, rules and regulations there under and the judicial and administrative interpretations thereof, which are subject to change or modification by subsequent legislative, regulatory, administrative or judicial decisions. Any such changes also could have an effect on the validity of our conclusions. Our comments are for the perusal only. Also other conditions like availment of ITC, valuation mechanism etc. has not been discussed here, which may subject to certain conditions deviate from the opinion so framed.
Author Bio
Hi Ankit,
Can you provide reference/link under which FAQ the aspect of demo vehicle was clarified by CBIC ?