GST On the Sale Of Used Cars – Rates, Rules & Tax Impact

Goods and Services Tax (GST) is a single indirect tax in India that applies to the supply of goods and services. It also applies to the sale of used or second-hand vehicles.

For example, Mr. Raj sold his old car to a used car dealer for ₹4,50,000. The dealer later sold the same car to another customer for ₹5,20,000. Under GST, tax is charged only on the dealer’s margin, not the full resale value. This margin is the difference between the selling and purchase price, excluding any repair or insurance costs.

Here is a simple example:

Who Needs to Pay GST on Used Cars?

The 18% GST on used cars applies only to GST-registered dealers—these are businesses or companies involved in buying and selling used vehicles. Well-known platforms like Cars24, Spinny, and others fall under this category.

Example: If a dealer purchases a car for ₹10 lakh and sells it for ₹12 lakh, the profit is ₹2 lakh. GST at 18% is charged only on this ₹2 lakh margin, not on the full price.

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What Does It Mean for Car Buyers?

If you’re buying from a registered dealer, the final price may be slightly higher as it includes GST on their profit. The tax is added to your bill, so you don’t have to pay it separately.

However, if the car is sold directly from one person to another (a private sale), GST does not apply. This makes private sales slightly more affordable but less secure compared to dealer purchases.

Is This a New Tax?

No, this is not a new tax. GST on used cars has been in place for a while. What has changed is the rate of GST. Earlier, some used cars were taxed at 12%, but now many of them are taxed at 18%.

The higher 18% GST now applies to specific types of vehicles, such as large petrol or diesel cars and SUVs.

Here is a simple table to explain:

Is GST Payable When There’s a Loss on Sale?

No, GST is not applicable if you sell a used car at a loss. GST is charged only when there is a profit (positive margin) on the sale. If the selling price is lower than the depreciated value of the car, the margin becomes negative, and hence, no GST is charged.

Let’s understand this with a simple example:

In this case, as the margin is negative ₹2,00,000, the seller has made a loss, and therefore no GST is payable.

Impact of GST on the Used Car Industry

The introduction of GST has brought clarity and uniformity to the taxation of used car sales in India. Before GST, different states levied different taxes, making the process confusing and costly. Under the GST system, tax rates are clearly defined and input tax credit (ITC) is better structured, but only for registered dealers.

Let’s break down the key impacts:

Input Tax Credit on Sale of Used Cars

Input Tax Credit (ITC) allows businesses to reduce the tax they have paid on purchases from the tax they collect on sales. However, when it comes to used cars, the rules are a bit different.

• If a used car is sold under the margin scheme, ITC cannot be claimed. This is because GST is charged only on the profit margin, not the full selling price.
• If the dealer has claimed ITC when purchasing the vehicle, then the margin scheme cannot be used, and GST must be paid on the entire selling price.

Let’s say a registered car dealer buys a used car for ₹5,00,000 and later sells it for ₹5,50,000. The GST treatment will depend on whether the dealer claims ITC (Input Tax Credit) on the purchase.

Case 1: Dealer Does Not Claim ITC (Uses Margin Scheme)

In this case, GST is applied only on the profit margin (difference between the selling and purchase price).

No ITC is claimed, and GST is paid only on the ₹50,000 margin.

Case 2: Dealer Claims ITC (No Margin Scheme Allowed)

Here, GST must be paid on the full selling price since ITC has already been availed.

Since ITC is claimed, the dealer cannot use the margin scheme. GST is charged on the entire selling price.

Conclusion 

The GST system has made the sale of used cars more structured and transparent. With the margin scheme, dealers now pay GST only on the profit made from a sale, not the full value of the car. This has helped reduce the tax burden and avoid double taxation.

Also Read - GST on Tyres

However, input tax credit (ITC) is not allowed if the margin scheme is used. Also, GST is not payable when a car is sold at a loss.

Overall, GST has simplified the tax process for the used car industry, but businesses must choose carefully between claiming ITC or using the margin scheme, depending on their situation.

FAQ’s

1. Is GST applicable on the sale of used cars?
Yes, GST is charged on the sale of used cars, but only on the profit margin, not the full price, if the margin scheme is used.

2. What is the margin scheme under GST?
The margin scheme allows dealers to pay GST only on the difference between the selling price and the depreciated value of the car.

3. Can I claim input tax credit (ITC) on used cars?
No, ITC is not allowed if the margin scheme is applied. If you claim ITC, then GST must be paid on the full sale value.

4. Is GST payable if I sell a car at a loss?
No, GST is not payable if the selling price is less than the car’s depreciated value. Negative margin means no tax.

5. What are the GST rates for used cars?
GST on used cars is usually 12% or 18%, depending on the engine size and fuel type. The rate applies only to the margin, not the full price.

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