The GST Council has clarified the tax framework for the sale of old and used vehicles, ensuring GST is applicable only on the margin between the selling price and the depreciated value of the vehicle. This move, applicable to registered persons, is expected to bring transparency and reduce the tax burden on second-hand car transactions. Here’s a detailed overview:
Table of Contents
Key GST Guidelines for Old and Used Vehicles
- Applicability of GST
- GST is payable only if the selling price exceeds the depreciated value of the vehicle.
- If the margin is negative (selling price < depreciated value), no GST is payable.
- GST Rate
- A uniform GST rate of 18% is now applicable to all old and used vehicles, including electric vehicles (EVs). Previously, different rates were levied based on the type of vehicle.
- No GST for Individual-to-Individual Sales
- When an individual sells a car to another individual, GST does not apply.
Calculation of GST on Margin
- If a registered seller has claimed depreciation under Section 32 of the Income Tax Act, the taxable margin is calculated as:
Selling Price – Depreciated Value of the Vehicle. - For other cases where depreciation is not applicable, the margin is calculated as:
Selling Price – Purchase Price.
Examples
- Negative Margin Scenario
- Purchase Price: ₹20 lakh
- Depreciated Value: ₹12 lakh
- Selling Price: ₹10 lakh
- Margin: ₹10 lakh – ₹12 lakh = Negative (No GST)
- Positive Margin Scenario
- Depreciated Value: ₹12 lakh
- Selling Price: ₹15 lakh
- Margin: ₹15 lakh – ₹12 lakh = ₹3 lakh
- GST Payable: 18% of ₹3 lakh = ₹54,000
- Non-Depreciation Case
- Purchase Price: ₹12 lakh
- Selling Price: ₹10 lakh
- Margin: ₹10 lakh – ₹12 lakh = Negative (No GST)
- Margin on Profit
- Purchase Price: ₹20 lakh
- Selling Price: ₹22 lakh
- Margin: ₹22 lakh – ₹20 lakh = ₹2 lakh
- GST Payable: 18% of ₹2 lakh = ₹36,000
Impact on Second-Hand EVs and Fossil Fuel Cars
- For EVs
- GST on second-hand EVs is now calculated on margins instead of the total sale value. This is expected to reduce costs for buyers if the margin remains below 27.78% of the purchase price.
- However, the increase in GST from 12% to 18% could slightly deter cost-sensitive buyers.
- For Small Fossil Fuel Cars
- The cost may increase marginally, by 0.6% to 1.5%, depending on the margin earned by the seller.
Challenges for Dealers
Dealers must maintain meticulous records of transactions to comply with the revised GST framework effectively. This includes:
- Accurate tracking of purchase prices.
- Proper documentation of depreciation.
- Transparent calculation of margins.
Expert Opinions
- Saurabh Agarwal (EY Tax Partner): The move aligns GST rates across vehicle categories, simplifying taxation while reducing the cost for second-hand EVs.
- Rajat Mohan (AMRG & Associates): While this revision enhances government revenues, it demands better compliance and could slightly affect the resale market for EVs.
Conclusion
The GST Council’s decision to tax only the margin in second-hand vehicle sales is a positive step for both buyers and sellers. It reduces the effective tax burden and fosters growth in the second-hand vehicle market. However, dealers must adapt to these changes, and cost-sensitive buyers of EVs may need to evaluate their purchasing decisions carefully.