GST Impact on supply of used car

Article explains GST on sale of second hand Car, Conditions to be satisfied for levy of GST on sale of second hand Car, Frequently Asked Questions related to GST on sale of used car and Illustration of GST on sale of used car.

Introduction: 

India has a robust automotive industry. The pre-owned or second-hand car market has been growing steadily over the past decade. Though there’s still a long way to go for it to be streamlined, there’s been a significant change in the way this market has grown over the year.

With the implementation of the GST Law, there has been chaos and confusion with regard to the taxability of supply of used car. In this article we would like to throw some light on current tax position of on supply of used vehicles.

GST on sale of second hand Car 

GST is levied on the transaction value on any supply of goods and services. However, there are exceptions to the rule. Rules have been prescribed under the law to value certain peculiar transaction. One such transaction is trading of used goods. In order to eliminate double taxation and cascading effect of tax, dealers in used goods are provided an option to pay taxes on the margin of the transaction i.e. Difference between the selling price and the buying price of such goods. In case of negative margin, no GST is payable. (Ref. Rule 32(5) of CGST Rules, 2017) 

Conditions to be satisfied for levy of GST on sale of second hand Car 

1. Supplier should be a person dealing in buying and selling of second hand cars

2. The supply of second hand cars should be a taxable supply

3. Cars must be subsequently sold on an “as is” basis or with minor processing which does not change the nature of the car

4. Supplier should not avail input tax credit on purchase of such cars

Frequently Asked Questions related to GST on sale of used car 

1. What is the value to be adopted in case of purchase and sale of used car by a car dealer?

As per Rule 32(5) of CGST Rules, 2017, the value on which GST is to be paid is on the margin (Sales Price – Purchase price). In case of negative margin, no GST is payable.

2. What is the value to be adopted in case sellers other than the dealers in used car ?

In such a case, valuation depends on whether the asset is a depreciable asset or not. In Case of depreciable asset tax to be remitted on difference between Selling price and Written down Value of asset calculated as per Income tax Act, 1961.

In all other cases, the difference between selling price and purchase price. 

3. What is the rate of tax on sale of used car?

The Government vide Notification No. 8/2018 Central Tax Rate w.e.f 25.01.2018 reduced the Rate of GST on old and used vehicle as follows:

Category of Car	GST Rate
Petrol Vehicles with more than 1200cc engine capacity & 4000mm length (HSN 8703)	18%
Diesel Vehicles with more than 1500cc engine capacity & 4000mm length (HSN 8703)	18%
SUVs (including utility vehicles) with more than 1500cc engine capacity (HSN 8703)	18%
Vehicles other than those mentioned above, including other vehicles under chapter 87	12%

Note: Sale of second hand cars is exempt from GST Compensation Cess vide Notification No. 1/2018 under the GST Compensation Cess Act 

4. Whether GST is to be paid on purchase of second hand car form unregistered person?

The Government has exempted GST on purchase of second hand car from unregistered person.

5. Whether separate invoicing under GST law on sale of car required?

No. The Invoicing to be done as per the invoicing rules of GST law. The valuation mechanism adopted to be mentioned in the invoice.

6. Whether a car dealer can avail the concessional rate benefit for demo cars?

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.

7. Whether dealers can avail the ITC on old and used cars purchased from the registered tax payers?

i. Generally, car dealers work based on margin earned on sale, therefore, they would opt for concessional tax rates and valuation as provided under notification 08/2018 CT(R) and similar notifications.

ii. If the dealers are not availing any exemption through the notifications, he would require to discharge GST on entire sale value at full tax rate, wherein he can avail the ITC on purchase of old and used

8. In case of sale of luxury cars and motor vehicles, TCS collected under the provisions of Income Tax will it be included in the Taxable value under GST?

No. The Government through Corrigendum to Circular No. 76/50/2018-GST dated 31st December, 2018 has clarified that TCS collected from customer need not be included in the value of supply.

Illustration of GST on sale of used car

In case of dealer trading in used car		In case of tax payer selling used car
Selling Price:	Selling Price:	Original Price	Original Price
15,00,000	8,00,000	15,00,000	20,00,000
Purchase Price:	Purchase Price:	Depreciated Value:	Depreciated Value:
10,00,000	10,00,000	10,00,000	10,00,000
Margin: Profit –	Margin: Loss	Selling Price:	Selling Price:
5,00,000	(2,00,000)	9,00,000	12,00,000
		Margin: Loss –	Margin: Profit:
		(1,00,000)	2,00,000
18%	18%	18%	18%
GST = 5,00,000*18 =	No GST as the	No GST as the margin	GST = 2,00,000*18 =
90,000	margin is negative	is negative	36,000