All you need to know about GST on used cars

Used car dealerships provide a valuable service by helping buyers find vehicles that fit their needs and budget. However, with the introduction of Goods and Services Tax (GST) in India, it has become essential for these dealers to understand its implications. In this article, we will discuss everything you need to know about GST for used car dealers.

The Goods and Services Tax (GST) system in India has been an important change in the country's tax structure. On December 21, 2024, the 55th GST Council, headed by Finance Minister Nirmala Sitharaman, announced a major update: a single GST rate of 18% on the sale of used cars, including Electric Vehicles (EVs). Earlier, GST rates for used cars were different, ranging from 5% to 28%, depending on the type of vehicle and the nature of the transaction. This decision has led to questions and confusion about GST on used cars.

GST rules for used cars

• Margin scheme: Under the margin scheme, GST is applied only on the difference between the purchase price and the sale price of the used car. This means the tax is charged only on the profit (difference), not on the entire sale price of the car
• Input Tax Credit (ITC): ITC is not available for used cars under the margin scheme. Normally, businesses can claim a credit for the GST paid on inputs, but when selling used cars, the seller cannot claim any input tax credit on the purchase of the vehicle
• GST rates on used cars: The GST Council has decided to apply a uniform 18% GST on all used vehicles, making the tax structure simpler. Previously, GST rates ranged from 5% to 28%

GST on used cars

Used car dealerships in India need to understand the latest GST rules that apply to their sales. Under the new GST framework, the sale of used cars is subject to a uniform GST rate of 18%. However, GST is charged only on the profit margin, which is the difference between the purchase price and the sale price of the vehicle.

For example, if a dealership buys a car for Rs. 5 lakh and sells it for Rs. 6 lakh, the GST will be levied only on the Rs. 1 lakh profit margin, not on the entire Rs. 6 lakh sale price. This helps keep the tax burden limited to the profit made by the dealer.

It is important for dealerships to ensure accurate calculation of the profit margin to determine the correct GST liability. Additionally, under the margin scheme, dealers are not eligible for Input Tax Credit (ITC) on the purchase of used cars, meaning they cannot claim any credit for the GST paid on the acquisition of the vehicle.

Example of GST Calculation on Used Cars

In India, GST on used cars is calculated based on the profit margin, which is the difference between the purchase price and the selling price of the vehicle. Let us look at two examples to better understand how this works.

Example 1: Selling a used car at a loss

Suppose a dealer buys a used car for Rs. 10 lakh and sells it for Rs. 8 lakh. The margin here is calculated as:

Margin = Selling price – Purchase price
Margin = Rs. 8 lakh – Rs. 10 lakh = (-Rs. 2 lakh)

Since the margin is negative, the dealer is selling the car at a loss. In such cases, no GST is applicable as there is no profit being made.

Example 2: Selling a used car at a profit

Now, let us consider a scenario where a dealer purchases a used car for Rs. 8 lakh and sells it for Rs. 10 lakh. The margin is:

Margin = Selling price – Purchase price
Margin = Rs. 10 lakh – Rs. 8 lakh = Rs. 2 lakh

In this case, the dealer is making a profit of Rs. 2 lakh. GST of 18% is applied only on the profit margin. The GST on Rs. 2 lakh profit is:

GST = Rs. 2 lakh * 18% = Rs. 36,000

Therefore, the dealer would need to pay Rs. 36,000 as GST on the profit made from the sale of the used car.

This method ensures that GST is only levied on the actual profit from the sale, not the entire transaction value, making it fair for dealers.

GST rate based on types of used cars

When purchasing a used car in India, the Goods and Services Tax (GST) rate varies based on the type and engine capacity of the vehicle. As of now, the GST rates for used cars are structured to ensure that buyers understand the tax implications. Below is a detailed explanation and a table summarizing the GST rates for different types of used cars:

GST on sale of used car parts

Apart from the sale of used cars, used car dealerships often sell parts and accessories as well. It is essential to note that different GST rates apply to different auto parts and accessories. The GST rates on auto parts are at 28%. It is crucial to understand the specific GST rates that are applicable for each product being sold.

Implications of GST for used car dealers

The introduction of GST has led to several changes in the used car dealership business. Here are some implications to be aware of:

1. Increased compliance requirements: With the introduction of GST, used car dealerships are now required to register for GST. This means that they must maintain proper books of accounts, file periodic GST returns, and be prepared to undergo GST audits.
2. Better transparency: GST has made the tax system more transparent, which means dealers can now claim input tax credit for the GST paid on purchases. Input tax credit allows dealerships to reduce their overall tax liability.
3. Improved supply chain management: GST has led to an improvement in supply chain management as logistics and transportation costs have decreased. With the introduction of GST, interstate transportation of vehicles has become more efficient, faster, and cost-effective.

GST has brought significant changes to the used car dealership business. Dealerships must be aware of the rules and regulations related to GST as it impacts their operations as well as their customers. The introduction of GST has made the tax system more transparent, improved supply chain management, and increased compliance requirements. Used car dealerships must understand the specific GST rates that apply to the sale of their cars and parts and follow proper compliance procedures.