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GST on Sale of Old Car: Complete Guide for Used and Second Hand Car Sale in India

GST on Sale of Old Car: Complete Guide for Used and Second Hand Car Sale in India

With rising prices and longer waiting periods for new cars, potential car buyers are exploring options in the pre-owned vehicle market. 

However, most individual buyers are unaware of the Goods and Services Tax (GST) implications applicable when purchasing a second-hand car from an individual or a used car dealer. There is confusion on certain aspects such as: Which vehicles attract what GST rates? Who pays this tax? Is GST charged on the full selling price or only on the dealer’s margin? As a buyer, you must gain clarity on these aspects so you can determine the final cost and make payments accordingly. 

This article explores the applicable used car sale GST in detail to help you make an informed decision.

What is the Supply of Goods under GST?

Before understanding if goods and services tax (GST) applies to the sale of a used car, it is important to understand what constitutes a “supply of goods” under the GST system.

A “supply of goods” refers to any type of transaction involving the selling, exchanging, transferring, bartering, leasing, renting, licensing, or disposing of something. This supply is treated as a taxable event, meaning it is subject to GST. In simpler terms, if one engages in any of these transactions, they may be required to pay GST on it.

However, for a transaction to qualify as a supply under GST legislation, two key conditions need to be fulfilled:

– Consideration: Some type of payment, compensation or benefit must be received in exchange for the transaction taking place.

– Furtherance of business: The transaction must occur as part of a commercial enterprise or activity.

If a transaction does not satisfy both the considerations of payment and the furtherance of business, it will not be viewed as a sale under the goods and services tax system.

Also, read – GST on home loan: How to calculate, rates & EMI impact

GST Applicable on the Sale of Old Cars

The applicability of GST on the sale of old cars depends on whether the seller is registered as a dealer under the GST system or is an unregistered dealer selling a used car.

GST on Sale of Used Car by Unregistered Individuals

In the case where an individual who is not registered for GST sells their second-hand car, this transaction is typically exempt from GST charges. This means that if a person not registered under GST sells their previously owned car, they do not have to collect GST on the sale price.

GST on Sale of Used Car by Dealers

The situation is, however, different when a dealer registered under the GST sells a used car. Registered dealers are required to charge GST on pre-owned cars because these sales are seen as supplies of goods under the GST rules and regulations. Since registered dealers buy and sell used cars regularly as part of their core business activities, GST applies to these transactions.

The table below provides a breakdown of how GST applies to the sale of old cars based on different scenarios.

Seller’s Usage TypeIs Seller Registered?Is Buyer Registered?GST Applicability
BusinessNoNo No
BusinessNoYesYes (reverse charge basis)
BusinessYesNo Yes
PersonalNoNo No
Car DealerYesNoYes

Latest GST Rates on Used, Pre-Owned, and Old Cars

Here’s how GST affects different categories of used cars:

Type of used carsGST on used carsCompensation cessTotal applicable cess
Petrol Car with engine capacity up to 1200cc12%Nil12%
Petrol Car with engine capacity over 1200cc18%Nil18%
Diesel Car with engine capacity up to 1500cc12%Nil12%
Diesel Car with engine capacity over 1500cc18%Nil18%

Input Tax Credit (ITC) and Depreciation Treatment in Used Car Sales

Input Tax Credit (ITC) and depreciation play an important role in determining the effective tax cost on the GST on second hand cars. Especially for businesses dealing in pre-owned vehicles or using them as business assets. Under GST, registered dealers selling used cars can claim ITC only if the vehicle was purchased with GST paid and the credit was not restricted at the time of purchase. However, if depreciation has been claimed on the GST component under the Income Tax Act, ITC on that portion is not allowed.

For individuals and unregistered sellers, ITC is not applicable, and the GST on second hand car sale is generally calculated under the margin scheme. That is, GST is charged only on the difference between the selling price and the purchase price, provided the sale price is higher. This reduces the tax burden on the GST on sale of used car and avoids double taxation.

From a depreciation perspective, businesses that capitalise vehicles can claim depreciation on the vehicle’s cost (excluding the GST component if ITC is claimed). When such a vehicle is sold later, the GST on sale of old vehicle applies based on the applicable GST rules, while depreciation adjustments are handled separately under income tax provisions.

Understanding the interaction between ITC, depreciation, and GST on used cars in India helps businesses and buyers make informed financial decisions and ensures compliance with tax regulations.

Also, read – GST on Personal Loan: Rates, Impact & What Gets Taxed in India

GST Compliance Checklist for Used Car Dealers in India

For used car dealers, staying GST-compliant is essential to avoid penalties and ensure smooth operations. Since GST on used cars in India follows specific valuation and reporting rules, a structured checklist can help dealers manage compliance with confidence.

  • Apply the margin scheme correctly while charging GST on second hand car sale to avoid taxing the full transaction value.
  • Calculate GST on sale of used car only on the margin (selling price minus purchase price), where applicable.
  • Use the correct HSN codes and applicable tax rates while invoicing for GST on sale of old vehicle.
  • Issue a proper tax invoice showing whether GST is charged under the margin scheme or regular scheme.
  • Maintain clear records of purchase value, selling price, and input tax credit eligibility.
  • File periodic GST returns accurately reflecting GST on second hand cars and reconcile them with books of accounts.

Following these steps ensures regulatory compliance while reducing audit risks and financial discrepancies.

Also, read – GST on Flat Purchase & Impact on Property Buyers

Impact of GST on Sale of Used Car

Earlier, the GST on the sale of old cars was 28%, plus an additional cess ranging from 1% to 15%. This made second-hand cars more expensive and led to a decline in the market. However, in 2018, the GST council made a significant change by reducing the GST on used cars to a range of 12% to 18%. They also removed the additional cess on the used cars.

This shift in taxation had significant impacts on the second-hand car market:

  • Price reduction: The most noticeable effect is a substantial drop in used car prices. The previous GST rates and cess contributed to higher costs. The reduction in these rates has made previously expensive used cars more affordable for buyers.
  • Differentiated GST rates: GST on used cars vary based on the size and type of the used car. Small/mini and medium-sized used cars are subject to an 18% GST, while luxury used cars have a 28% GST. This targeted approach aims to provide relief to buyers of smaller vehicles.
  • Transparency and streamlined transactions: The implementation of GST on used cars has enhanced transparency in transactions within the second-hand car market. The standardised taxation process has made it clearer for both buyers and sellers, reducing ambiguity in pricing.
  • Dealer margins and discounts: The revised GST on used cars have increased profit margins for second-hand car dealers. This has enabled dealers to offer more attractive discounts to customers, making the overall buying experience more appealing.

Conclusion

Understanding GST on second hand cars is crucial for both buyers and dealers to ensure compliance and accurate pricing. Whether calculating GST on second hand car sale, GST on sale of used car, or GST on sale of old vehicle, clarity on applicable rates and schemes is essential. 

For businesses, maintaining proper records and following GST norms safeguards against penalties. With evolving regulations, staying updated on GST on used cars in India helps make informed financial decisions, ensures smooth transactions, and promotes transparency in the pre-owned car market.

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FAQs

Who is liable to pay GST in the sale of used cars by the Government?

If the sale is to a registered person, the registered taxpayer must pay the GST. If it is to an unregistered person, the relevant Government Department must obtain GST registration and pay the tax.

How to calculate the GST on sale of second hand car?

The GST on the sale of a second-hand car is calculated based on Rule 32 (5) of the Margin Scheme, which states that the individual dealing in second-hand cars must pay the GST only on the difference amount (Sale amount minus purchase amount).

Is there a specific GST rate for the sale of old commercial vehicles?

No, there is no specific GST rate for sale of old commercial vehicles. The GST rate on commercial vehicles will be the same as that mentioned in Notification No 8/2018- Central Tax (Rate) dated 25th January 2018.

How to calculate the GST on sale of used car?

The GST on the sale of a second-hand car is calculated based on Rule 32 (5) of the Margin Scheme, which states that the individual dealing in second-hand cars must pay the GST only on the difference amount (Sale amount minus purchase amount).

Is there a specific GST rate for the sale of old commercial vehicles?

No, there is no specific GST rate for sale of old commercial vehicles. The GST rate on commercial vehicles will be the same as that mentioned in Notification No 8/2018- Central Tax (Rate) dated 25th January 2018.

Is there any exemption from GST on sale of used car?

The GST rate is only applicable for businesses or people registered for GST. Private sales are exempted from this amount.

What does the GST on sale of used cars notification entail?

Typically, the GST rate on the sale of second-hand vehicles is 18%. If a dealer has purchased a used car from another registered dealer, the seller must collect and pay the GST.

Is GST applicable on sale of used car by individual?

GST is generally not applicable when an individual sells their personal vehicle. Only dealers charge GST on second hand cars or GST on second hand car sale.

How is GST calculated on second hand car sale under the margin scheme?

Under the margin scheme, GST on sale of used car or GST on sale of old vehicle is calculated only on the dealer’s margin, not the full selling price.

What is the current GST rate on sale of used and old cars in India?

The GST on used cars in India ranges from 12% to 18%, depending on engine size and fuel type. This is the standard GST on second hand cars.

Can input tax credit (ITC) be claimed on sale or purchase of pre-owned cars?

For registered dealers, GST on second hand car sale allows claiming input tax credit (ITC) only if GST was paid at purchase. Individuals typically cannot claim ITC on GST on second hand cars.

Are there GST exemptions for selling old vehicles owned by a business?

Yes, certain transactions may be exempt, but generally businesses must charge GST on sale of used car. Understanding GST on used cars in India rules helps ensure compliance with GST on used cars in India regulations.

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