Decoding 18% GST on resale of old vehicles: What buyers and sellers need to know

The GST Council has prescribed a single rate of 18% on the sale of old and used vehicles, including electric vehicles (EVs), replacing the earlier variable rates. However, confusion prevailed following Union Finance Minister Nirmala Sitharaman's clarification on the calculation method.

Addressing the media after the 55th GST Council meeting on December 21, Sitharaman said the 18% GST would apply only to the margin—the difference between the purchase and resale price of the vehicle.

Citing an example, she said: "It is on that margin, the value, the margin value, between purchased price and resale price... ₹12 lakh mein khareeda, ₹9 lakh mein bech rahe hain (Purchased at ₹12 lakh, selling at ₹9 lakh in the name of the used vehicle)... on the margins only this 18% is being put."

The statement sparked confusion among social media users about whether GST would apply to the depreciated value of vehicles.

Government sources clarified that GST is payable only if the seller earns a margin, i.e., the selling price exceeds the depreciation-adjusted cost price of the vehicle, reported PTI.

No GST is applicable if an individual sells a vehicle to another individual, according to the report.

For registered sellers who claim depreciation under Section 32 of the Income Tax Act, GST is payable on the difference between the sale price and the depreciated value. If this margin is negative, no GST is levied.

• If a registered person sells a vehicle for ₹10 lakh, purchased at ₹20 lakh with ₹8 lakh depreciation claimed, the margin (₹10 lakh - ₹12 lakh) is negative, and no GST is payable.

• If the same vehicle is sold for ₹15 lakh, the margin (₹15 lakh - ₹12 lakh) is ₹3 lakh, and GST at 18% will apply to ₹3 lakh.

• For cases without depreciation, GST applies only to the difference between the purchase and resale prices. If the purchase price of the vehicle is ₹20 lakh and the selling price is ₹22 lakh, GST of 18% will be payable on the margin of the supplier, that is, ₹2 lakh.

Will 18% GST on used cars increase the cost for buyers?

Buyers purchasing a used car from an individual will not have to pay Goods and Services Tax (GST). However, the scenario changes when purchasing from platforms like CarDekho, OLX, showrooms, or other registered dealers.

If a platform purchases a used car for ₹2 lakh and sells it for ₹2.6 lakh after repairs, 18% GST will be applicable on the margin of ₹60,000 earned. Earlier, a 12% GST rate was applicable to such margins. The increase in GST from 12% to 18% on margins is expected to raise the overall price of used cars.

However, EY Tax Partner Saurabh Agarwal, insisted that the proposed change should not be looked as a deterrent for second hand EVs, reported PTI.

"This should in turn be a welcome step as it would likely bring down the cost for second hand EVs (till the time margins earned are less than 27.78 per cent of the purchase price). At best, it will increase the cost of second hand small fossil fuel cars by 0.6-1.5 per cent (assuming margins would range for 10-25 per cent of purchase price)," PTI quoted Agarwal as saying.

AMRG & Associates Senior Partner Rajat Mohan observed that while the revision boosts government revenue, dealers must maintain precise transaction records to ensure compliance, according to the PTI report.

"Dealers will now need to maintain impeccable records of transactions to comply with these changes effectively. While this revision boosts revenue potential for the government, it demands adaptability from businesses and awareness among consumers regarding the net impact on resale pricing," Mohan added.