GST on Sale of used Cars and Other Vehicles by Businesses/Companies

Introduction: Navigating the complexities of GST on the sale of company-owned vehicles is crucial for businesses. I have recently received more than a dozen queries regarding the GST implications on the sale of used vehicles, primarily cars held for directors and other employees of the company. Generally, Input Tax Credit (ITC) is not claimed in such cases, even in the previous VAT and Excise regimes. The confusion surrounding ITC reversals and output tax on the sale of such vehicles arises from a plethora of articles, interconnected provisions, and extensive misinformation on the internet.

This article clarifies the confusion surrounding Input Tax Credit (ITC), depreciation, and output tax on Sale of Used vehicles/Cars according to Notification No- 8/2018 (Central Tax Rate) dated 25.01.2018.

The details presented here apply to all sale transactions entered on or after 25th January 2018.

This information is equally applicable to all GST registered entities, including companies, partnership firms, LLPs, societies, trusts, AOPs, BOIs, proprietorships, etc.

It does not apply to entities that have legitimately claimed ITC on such cars/vehicles, such as taxi operators, freight companies, vehicle dealers, passenger transport services, etc.

CASE A – Vehicle Purchased, Input Not Availed, and Depreciation Claimed under Income Tax Act (Section 32):

• GST leviable at 12% in accordance with the above notification.

Taxable value for GST registered sellers: Sale price less the depreciated value (Nil in case of negative taxable value.

Author’s opinion: Depreciated value as per the Income Tax Act, 1961.

• Taxable value for GST non-registered sellers: Sale price less purchase value (Nil in case of negative taxable value)

Author’s note: Rarely taxable as vehicles are rarely sold at a higher than purchase price).

Common Myths:

A) ITC to be reversed – No ITC can be reversed under Rule 42, 43 since no input has been taken earlier.

B) Section 18(6), Rule 44 (6), Rule 40(2) Applicability – These sections and rules are applicable to capital goods only, and Rule 44(6) is not applicable as no ITC has been taken.

C) Tax rate similar to a new car : The aforementioned notification (8/2018) is more specific to general tax rates and overrides the tax rates of new cars.

CASE B – Vehicle Purchased, Input Not Availed, and Depreciation Not Claimed in Income Tax Act:

• GST leviable at 12% in accordance with the above notification.
• Taxable value for GST registered/non-registered sellers: Sale price less purchase value (Nil in case of negative taxable value).

Common Myths:

A) ITC to be reversed – No ITC can be reversed under Rule 42, 43 since no input has been taken earlier.

B) Section 18(6), Rule 44 (6), Rule 40(2) Applicability – These sections and rules are applicable to capital goods only, and Rule 44(6) is not applicable.

C) Tax rate similar to a new car : The aforementioned notification is more specific to general tax rates and overrides the tax rates of new cars.

Practical Issues Faced by Assesses:

• Presumptive Taxation:

In many cases, the assessee is under the presumptive taxation scheme under the Income Tax Act, 1961 (i.e. taxable under sections 44AD, 44AE, 44ADA, etc.). In such cases, a genuine dilemma may arise concerning whether the assessee falls under Case A or Case B.

A detailed analysis clarifies that presumptive taxation u/s 44AD, 44AE, 44ADA, etc. presumes that the assessee has availed all the expenses allowed under the Income Tax Act (from Section 30 to 38).

For instance, Section 44AD (2) states, “Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.”

Hence, in the author’s opinion, all the assesses falling under presumptive taxation will fall under Case A.

• Computation of Depreciated Value:

Another dilemma faced by the assessee in Case A is the computation of the depreciated value of the vehicle. As pointed out above, in the author’s opinion, the depreciated value should be construed as per the Income Tax Act and not as per the accounting policy of the assessee.

However, the Income Tax Act prescribes the block method of fixed assets, which does not disclose the written-down value (i.e., depreciated value) of an individual asset. Thus, in the author’s opinion, the depreciated value should be computed as follows:

Step I – Calculate the depreciated value of the individual vehicle from the date of put to use until the latest preceding financial year closing. (Depreciated value can be computed up to the current financial year also, but that would be subject to higher chances of litigation due to the silence of the provisions of the act on this subject matter).

STEP II – Compare the value of Step I with the corresponding value of the block of assets:

• • If Step I > Step II, then the depreciated value is as computed in STEP II,
  • Otherwise, Step I value is the depreciated value.

Conclusion: This article untangles the GST implications on the sale of company vehicles, addressing common myths and providing practical insights. Understanding Cases A and B, along with considerations for presumptive taxation and depreciated value computation, empowers businesses to navigate this aspect of GST with clarity.

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Disclaimer: The information contained in this document is intended solely for the dissemination of information and doesn’t aim to solicit work in any manner. Although meticulous care has been taken, the author assumes no liability regarding any loss/damage incurred while acting on the basis of the provided information. The above framework has been developed by the author after researching for a long time and is proprietary intellectual property. The author can be reached at AKSHAY.AKAC@GMAIL.COM and can be called at +91-7011503210.