Taxation of Car, On crossroads of GST

Arjun (Fictional Character): Krishna, is GST applicable on purchase or Sale of Car. Further what are the provision, rules of GST in such transactions?

Krishna (Fictional Character): Arjuna, This is very good question you have asked. Since the GST law has came into force various notifications and amendment has been made on issue of old car sale. GST rate which is levied and its ITC provisions depend on what type of passenger vehicle we purchase i.e. 2-Wheeler/4-Wheeler/Bus etc.  Let us discuss this in detail.

Arjun: Krishna, what is taxability on purchase of new car?

Krishna: Arjuna, On Purchase of New Car GST @ 28% and cess is charged. Cess is charged depending on the CC and length of the car. The rate of cess varies from 15% to 22%.

Arjun: Krishna, can one avail the ITC on new vehicle purchased?

Krishna: Arjuna, Cars are of 2 types-a) Goods vehicle and b) Passenger vehchicle. If it is Goods vehicle then ITC on purchase of such vehicle can be availed but if the passenger vehicle such as car is purchased then ITC on is not allowed. If the business of the taxpayer is of trading of Car or if the cars are given on hire by the taxpayer then he can avail ITC on purchase of vehicles. ITC of GST on repairs and maintenance of car is a debatable issue.

Arjun: Krishna, what if someone sell his old car?

Krishna: Arjuna, Department has issued notification for sale of old car on 25^th January 2018. As per notification GST is charged on Margin. If car is used for business and depreciation as per Income Tax Act has been provided on the Car purchased, then GST will be calculated on the Margin. Further rate of GST on such sale of old cars is 12% or 18% depending upon the type of car. On sale of old vehicles cess is not levied.

For Example-

1. If Mr. A has purchased Hyundai i20 for business purpose of Rs. 8 Lakhs in the year 2016-17 and the depreciated value after 2 years of the car is Rs. 5.5 Lakhs and the car is sold for Rs 6.5 Lakhs then GST will be charged on Rs 1 Lakhs (6.50-5.50).

2. In the above example if the depreciated value of the car is Rs 5.5 Lakhs and it is sold by Mr. A for Rs. 5 Lakhs then no GST will be charged.

3. If depreciation is not charged on Vehicle then GST will be charged on difference of Sale Price – Cost of Purchase. For Ex- If a taxpayer earning Salary Income has purchased Car for Rs. 8 lakhs and sells it after 2 years at Rs 6 lakhs then no GST will be charged as the sale price is lower than Purchase Cost. Further in the same case if the car is sold for Rs. 8.50 Lakhs then GST will have to be paid on Rs. 50,000/-.

4. If the taxpayer deals in 2^nd Hand vehicles and sells them, then GST will be charged on margin. For e.g. if Maruti alto purchased for Rs. 2 Lakh and sold for 2.25 lakh then GST will have to be paid on Rs. 25000/-.

Arjun: Krishna, what lesson the taxpayer should take from this?

Krishna: Arjuna, while purchasing passenger vehicle many does not get the credit of GST paid on it. However when we sell the car we have to pay GST on margin. Further everyone should take decision of levying GST according to type of car.