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.
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.
Unregistered:
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.
Registered:
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 Type
Is Seller Registered?
Is Buyer Registered?
GST Applicability
Business
No
No
No
Business
No
Yes
Yes (reverse charge basis)
Business
Yes
No
Yes
Personal
No
No
No
Car Dealer
Yes
No
Yes
GST rate based on types of used car
Here’s how GST affects different categories of used cars:
Types of used cars
GST on used cars
Compensation cess
Total applicable cess
Petrol Car with engine capacity up to 1200cc
12%
Nil
12%
Petrol Car with engine capacity over 1200cc
18%
Nil
18%
Diesel Car with engine capacity up to 1500cc
12%
Nil
12%
Diesel Car with engine capacity over 1500cc
18%
Nil
18%
Impact of GST on used cars in the second-hand market
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.
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.
29 November 2024
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