GST on sale of used vehicles when depreciation was claimed

Summary: Under GST law, the sale of used motor vehicles on which depreciation was claimed and input tax credit (ITC) was not availed is subject to a special margin-based taxation mechanism. When ITC was claimed at purchase, Rules 40(2) and 44(6) apply, and GST is payable on the full sale price. However, if ITC was not claimed and depreciation was claimed, these rules do not apply, and GST is levied only on the margin, calculated as the difference between the selling price and the written down value (WDV) determined under the Income Tax Act as of the date of supply. If the sale results in a loss, no GST is payable, and no reporting is required in GSTR-1. For instance, a car purchased for ₹10 lakh and sold at ₹3 lakh after depreciation results in a loss; thus, no GST is charged. Conversely, if sold at ₹8.5 lakh with a WDV of ₹8,19,230, GST is levied only on the margin of ₹30,770 at the current rate of 18% (as per Notification No. 04/2025-Central Tax). Compensation cess applies only if ITC was claimed initially. Vehicles purchased before GST without input credit follow the same margin-based framework. Depreciation is computed yearly as per the Income Tax Act, and the WDV is updated to the date of sale. This approach ensures that GST reflects the actual economic benefit from the sale, preventing undue tax on depreciated assets and aligning GST liability with the financial reality of used vehicle transactions. Buyers benefit from potentially lower prices, while sellers comply with GST reporting requirements.

1. Introduction:

There is a separate provision for levying of GST on sale of used vehicles where ITC was not availed & depreciation was claimed. This article explains the provisions in detail, covering Rule 40(2) & Rule 44(6).

2. Scenario:

• If ITC was availed then Rule 40(2) & 44(6) will be applicable at the time of sale.
• If ITC was not availed & depreciation was claimed then Rule 40(2) & 44(6) will not be applicable. I am covering this topic in this article.

3. Section 17(5):

• • ITC can be availed if vehicles used for transportation of goods. Example: Trucks.
  • ITC can be availed if vehicles used for transportation of persons having capacity more than 13 passengers including driver. Example: Buses.
  • ITC cannot be availed if vehicles used in transportation of persons having capacity upto 13 passengers including driver. Example: Bikes, Cars, Auto rickshaws etc. There are some exceptions of it.

4. Old motor vehicles sold:

a. ITC availed:

• • If ITC is availed at the time of purchase then Rule: 40(2) & Rule: 44(6) will be apply.

b. ITC not availed:

• • If ITC is not availed at the time of purchase then Rule: 40(2) & Rule: 44(6) will not be apply. Specific provision are given for this which I am covering in this article.

5. General cases:

If ITC is not availed at the time of purchase then Rule: 40(2) & Rule: 44(6) do not apply & GST will be payable on the selling price but in case of old vehicles, GST will not be charged on the selling price.

6. GST on margin:

In case of sell of old vehicles on which ITC was not availed & depreciation was claimed, GST will be charged on the margin amount not on the selling price.

7. Meaning of margin:

Margin: Selling price (-) WDV as on the date of supply

8. Computation of WDV:

a. WDV will be calculated as per Income Tax Act as on the date of supply.

b. Suppose, date of supply is 13^th July 2025 then WDV will be calculated as on 13^th July 2025.

9. Margin on sale:

GST will be levied on margin amount & it will be the GST liability which will be report in GSTR-1.

10. Loss on sale:

There will be no GST liability if old vehicles sold at loss.

11. Reporting in return:

a. Margin amount is 1,00,000 & GST amount is 18,000. In GSTR-1, taxable value will be 1,00,000 & GST value will be 18,000.

b. In case of loss, there will be no reporting in returns. It is not treated as an exempt sales.

12. Illustration 1:

a. Depreciation charged in FY 22-23: 96,000

b. Depreciation charged in FY 23-24: 1,77,600

c. Depreciation charged in FY 24-25: 1,50,960

d. Depreciation charged till 12-7-25: 36,210

** Depreciation will be calculated in the year 25-26 from 1^st April 2025 to 12^th July 2025 for 103 days.

** In this case, there is a loss. Hence, no GST will be levied at the time of sale & there will be no reporting of sale in GST return.

13. Illustration 2:

a. Depreciation charged in FY 22-23: 96,000

b. Depreciation charged in FY 23-24: 1,77,600

c. Depreciation charged in FY 24-25: 1,50,960

d. Depreciation charged till 12-7-25: 36,210

** Depreciation will be calculated in the year 25-26 from 1^st April 2025 to 12^th July 2025 for 103 days.

In this case, there is a margin. Hence, GST will be levied at the time of sale on 30,770 instead of 8,50,000.

14. GST rate on margin:

1. GST rate was increased from 12% to 18% vide notification: Notification No. 04/2025-Central Tax (Rate).
2. Any used vehicles sold on or after 16-01-2025, rate will be 18% irrespective the length or engine capacity of sold vehicles.

15. Rule 42 or 43:

In case of loss on sale, there will be no reversal of input, input services and capital goods under Rule 42 & 43.

16. Compensation cess on sale:

a. If ITC was availed at the time of purchase then cess will be levied on sale if applicable.

b. If ITC was not availed at the time of purchase then cess will not be levied on sale of old and used vehicles. {Notification No. 1/2018-Compensation Cess (Rate)}.

It reduces the cost of potential buyers.

17. Link of the article Rule 40(2):

https://taxguru.in/goods-and-service-tax/gst-sale-capital-goods-section-18-6-rule-40-2.html

18. Link of the article Rule 44(6):

https://taxguru.in/goods-and-service-tax/gst-sale-capital-goods-itc-claimed.html

19. Purchased before GST:

If a vehicle was purchased before the implementation of GST and no input credit of VAT or CST was claimed, the same provision explained above will apply.

I am covering this case with a practical case:-

a. Depreciation will be charged for full year in the year 2010-11 as per IT Act.

a. There is a loss of Rs 30,913 which is calculated in below table. Thus there will be no GST on sale of motor vehicles.

If you have any queries, you can reach the author by email at caashishsingla878@gmail.com or by phone at 9896478194.

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Disclaimer: The views and opinions expressed in this article are those of the author. This article is intended for general information purposes only and does not constitute professional advice. Readers are strongly advised to consult a qualified professional for guidance specific to their individual situation before making any financial, legal, or tax-related decisions. The author shall not be held liable for any loss or damage of any kind incurred as a result of the use of this information or for any actions taken based on the content of this article.