GST Provisions on Sale of Used (Second-Hand) Cars: A Detailed Analysis

In India, rising new car prices and long waiting periods have shifted the focus of car buyers toward the second-hand or used vehicle market. However, many individual buyers are unaware that these transactions are also subject to Goods and Services Tax (GST). It follows that it is important for both professional and consumer parties to understand the correct proliferation of GST provisions on second – hand car purchases.

This article provides a detailed analysis of GST provisions related to the sale of used (second-hand) cars, highlighting the key aspects important for tax professionals and the general public.

Understanding “Supply of Goods” Under GST

Newly purchased vehicles’ price hikes and extensive waiting periods in India have led car customers to consider second-hand vehicle purchases. There are many individual buyers who do not know that these transactions are of GST as well. Therefore it is necessary for both professional as well as consumer parties to know how the law is applicable on the second-hand car sale or purchase in terms of its provisions for numerical growth or increase of use of GST for second-hand car buyers.

This article attempts to present a straightforward report on GST provisions related to the sale of used (second-hand) cars, which can be useful to tax lawyers and the wider public understanding the range of important issues.

“Supply of Goods” – Conceptual Clarity within the Framework of GST

The term “supply of goods” in the context of GST is very wide. All the above transactions are categorised as supply of goods, the case where goods are sold, or transferred, exchanged, bartered, leased, rented, licensed or disposed of. This supply is taxable under GST Law.

Simply put, if any person or organizatiion is engaged in buying and selling vehicles, GST may be applicable to that transaction. This condition applies equally to second-hand car transactions.

Sale of Used Cars Under the GST Act

The rules governing the sale of second-hand or used cars under the GST Act depend on whether the seller is registered for GST or not..

# (A) Sale of Car by an Unregistered Seller

When an unregistered individual sells a used car, the transaction is generally not subject to GST. This means that if a person is not registered under GST and sells their used car, they are not required to pay GST on the sale. Such transactions fall outside the scope of GST.

(B) Sale of the Car by a Registered Seller

In the case of a registered seller, which is the case for taxable people carrying on business, the outcome is different. The registered seller must charge GST on the sale under the provisions of the GST Act. There are times when registered dealers who conduct the business of regularly buying and selling second hand cars that those types of sales are considered commercial activities. Most importantly, sales of that kind constitute the taxable supply of goods and services except that they are GST exempt.

Gst over Tax Key Factors Affecting The Applicability Of GST

There are several important factors that affect the applicability of GST on the sale of used cars. These are explained in the following table:

This table clearly indicates that GST is applicable on the sale of used cars only when the seller is registered. If the seller is not registered for GST, no GST will be levied on the sale. However, if the buyer is registered, and the seller is unregistered, the buyer will be liable to pay GST under the reverse charge mechanissm (RCM).

GST Rule 32(5) – Valuation and Taxation

GST Rule 32(5)  is a crucial provision for regulating the supply of second-hand goods. According to this rule, if the used car is sold in the same condition or after minimal processing that does not alter its essential nature, GST will be levied on the difference between the selling price and the purchase price. If this difference is negative, it will be ignored.

Key points of Rule 32(5) include:

The rule applies when the used car is sold after minimal processing, without altering its original nature..

If the seller has not claimed Input Tax Credit (ITC) on the purchase, GST is only payable on the margin (profit.).

If the difference between the selling price and purchase price is negative, no GST will be applicable..

Notification 8/2018 Central Tax (Rate)

Notification 8/2018  outlines the GST rates for the sale of used cars. According to this notification, the GST rates on the sale of second-hand cars depend on the type of vehicle and its engine capacity.

# GST Rates for Used Petrol/Diesel Cars:

Petrol and CNG Vehicles (with an engine capacity above 1200cc and length greater than 4000mm.): 9%

Diesel Vehicles (with an engine capacity above 1500cc and length greater than 4000mm.): 9%

SUVs (Sports Utility Vehicles.) : 9%
All Other Types of Used and Second-Hand Vehicles. : 6%

Margin Scheme for the Sale of Used Vehicles.

GST includes a  Margin Scheme  for the sale of used vehicles. Under this scheme, if the seller has not availed ITC on the purchase, GST will only be applicable on the profit margin.

Under this scheme, the seller only has to pay GST on the margin (profit) made on the sale. For example, if a seller buys a car for ₹5,00,000 and sells it for ₹6,00,000, they will only be liable to pay GST on the ₹1,00,000 profit, not on the total sale value.

GST Adjustments with Depreciation

If the seller has claimed depreciation under the Income Tax Act, 1961, the GST will be calculated based on the difference between the sale price and the depreciated value of the vehicle. If this difference is negative, no GST will be levied..

Reverse Charge Mechanism (RCM)

In some situations, the  Reverse Charge Mechanism (RCM)  applies. If the seller is unregistered for GST and the buyer is registered, the buyer must pay GST on the transaction under RCM.

Conclusion

Understanding GST provisions on the sale of used or second-hand cars and correctly calculating the tax is crucial for any tax professional. This article explains that the applicability of GST depends on the registration status of both the seller and the buyer, as well as the nature of the transaction.

If the seller is registered under GST, they must pay GST on the sale of a used car. If the seller is unregistered, GST is not generally applicable. Additionally, for second-hand car sales, the Margin Scheme allows GST to be paid only on the profit margin rather than the entire sale amount.

Hence, it is essential for professionals and businesses involved in the sale of second-hand vehicles to adhere to these GST provisions, ensuring compliance with the tax laws governing the supply of goods..