GST on Used Cars: New Rules and How They Affect Buyers and Businesses

The GST Council’s recent clarification on the taxation of used cars, including electric vehicles (EVs), has introduced a standardized GST rate of 18%. While this move aims to simplify compliance and bring uniformity, it comes with nuances that impact businesses and individual buyers differently. Here’s a detailed breakdown of the new rules and their implications.

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Key Changes to GST on Used Cars

Applicability

• The 18% GST applies only to vehicles sold by registered businesses such as dealers and suppliers.

• GST is levied on the margin of the supplier, which is calculated as:

  1. The difference between the selling price and the purchase price, or
  2. The difference between the selling price and the depreciated value if the seller has claimed depreciation under Section 32 of the Income Tax Act.

• No GST is payable if the margin is negative (i.e., the selling price is less than the purchase price or depreciated value).

Individual Transactions

• Transactions between individuals remain taxed at the existing 12% GST rate.
• The new 18% GST rate does not apply to private transactions.

Depreciation-Based Margin

• If depreciation has been claimed by a seller, the taxable margin is calculated as the difference between the selling price and the depreciated value.
• If no depreciation has been claimed, the margin is simply the difference between the selling price and purchase price.

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Examples of GST Calculation

1. Negative Margin – No GST

• Scenario: A registered business purchased a car for ₹20 lakh and claimed depreciation of ₹8 lakh. The depreciated value is ₹12 lakh. The car is sold for ₹10 lakh.
• Calculation:
  • Margin = Selling Price (₹10 lakh) - Depreciated Value (₹12 lakh) = Negative Margin (₹2 lakh).
  • GST: No GST is payable as the margin is negative.

2. Positive Margin – GST Payable on Margin

• Scenario: The same car is sold for ₹15 lakh instead.
• Calculation:
  • Margin = Selling Price (₹15 lakh) - Depreciated Value (₹12 lakh) = ₹3 lakh.
  • GST: 18% of ₹3 lakh = ₹54,000.

3. Dealer Transaction Without Depreciation

• Scenario 1: A dealer purchased a car for ₹12 lakh and sells it for ₹10 lakh.

  • Margin = Selling Price (₹10 lakh) - Purchase Price (₹12 lakh) = Negative Margin (₹2 lakh).
  • GST: No GST payable.

• Scenario 2: The dealer sells the car for ₹22 lakh.

  • Margin = Selling Price (₹22 lakh) - Purchase Price (₹20 lakh) = ₹2 lakh.
  • GST: 18% of ₹2 lakh = ₹36,000.

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GST Implications for Individual Buyers of Used Cars

1. Buying a Used Car in a Private Transaction

Scenario:

An individual buys a used car directly from another individual for ₹10 lakh.

GST Implication:

When two individuals exchange a vehicle, GST is levied at 12% as per existing rules, not the revised 18%. This is because the 18% GST rate applies only to registered businesses, such as dealers or suppliers.

Breakdown of Costs:

• Sale Price: ₹10 lakh
• GST (12%): ₹1.2 lakh
• Total Cost to Buyer: ₹11.2 lakh

Practical Impact:

• The buyer is less affected compared to purchasing from a dealer (where the GST rate is 18%).
• Individuals may prefer private transactions over business-to-consumer deals to save on taxes.
• However, such transactions might lack warranties or guarantees typically offered by dealers.

2. Buying a Used Car from a Dealer

Scenario:

An individual buys a used car from a registered business or dealer for ₹10 lakh.

GST Implication:

The dealer charges 18% GST on their margin, not the total price.
The dealer’s margin is the difference between the purchase price (what the dealer paid for the car) and the selling price.

Example:

• Dealer’s Purchase Price: ₹8 lakh
• Selling Price: ₹10 lakh
• Dealer’s Margin: ₹2 lakh
• GST (18%): ₹36,000
• Total Cost to Buyer: ₹10.36 lakh

Practical Impact:

• Although GST is applied only to the dealer's margin, the buyer might perceive the tax as a cost increase.
• Dealers may pass on the GST burden to buyers, leading to higher prices compared to private transactions.

3. Buying a Company-Leased Car (Employer-Sponsored Lease)

Scenario:

An individual purchases a car that was previously leased by their employer as part of a company car policy.

GST Implication:

Many companies claim depreciation on leased vehicles under Section 32 of the Income Tax Act. When selling the car, GST is charged on the margin, calculated as: Margin = Selling Price − Depreciated Value.

Example:

• Original Purchase Price by Employer: ₹20 lakh
• Depreciation Claimed: ₹8 lakh
• Depreciated Value: ₹12 lakh
• Selling Price to Employee: ₹14 lakh
• Margin: ₹14 lakh - ₹12 lakh = ₹2 lakh
• GST (18%): ₹36,000
• Total Cost to Employee: ₹14.36 lakh

Practical Impact:

• Employees purchasing leased cars may face a higher effective cost due to the 18% GST on the margin.
• However, the depreciated value reduces the margin, minimizing the tax burden compared to a scenario without depreciation.

Comparison of Scenarios

Scenario	Tax Rate	Margin Basis	GST Amount	Total Cost Impact
Private Transaction Between Individuals	12%	Selling Price	₹1.2 lakh	Lower tax, but no dealer benefits
Dealer Transaction	18%	Dealer’s Margin	₹36,000	Slightly higher cost, warranty included
Company-Leased Car	18%	Selling Price - Depreciated Value	₹36,000	Tax based on margin, depreciation minimizes impact

Key Takeaways for Individual Buyers

Private Transactions:

• Attract lower GST (12%) but may lack added services like warranties or servicing offered by dealers.
• Can be a cost-saving option for budget-conscious buyers.

Buying from Dealers:

• The 18% GST is limited to the dealer's margin, not the full price, which reduces the burden somewhat.
• Buyers gain access to benefits like post-sale support and financing options.

Company-Leased Cars:

• Depreciation lowers the taxable margin, making the 18% GST less significant.
• Employees purchasing leased cars may find it cost-effective compared to other options.

The GST changes, while targeting clarity and fairness, emphasize careful consideration of seller type and transaction structure to minimize costs for individual buyers.

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Implications of GST Changes

Impact on Businesses

• The standardized 18% GST simplifies compliance and ensures consistency.
• Dealers may struggle with thin margins as the GST on the margin could reduce profitability.
• Higher prices may discourage buyers, potentially slowing the $32 billion pre-owned car market.

Impact on Consumers

• Private transactions remain relatively unaffected, with the GST rate unchanged at 12%.
• Buyers purchasing from businesses may face increased costs due to the higher GST rate on margins.
• Consumers might shift towards private transactions to save on taxes.

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Conclusion

The GST Council’s decision to levy an 18% tax on the margin of used cars sold by registered businesses simplifies the taxation process but introduces challenges. While private transactions are unaffected, businesses must carefully manage their margins to stay competitive. Consumers, particularly those buying from dealers or leasing cars through employers, should be mindful of the additional costs and consider options that balance affordability and benefits. The changes, though well-intended, could slow down the growth of India’s pre-owned car market by impacting affordability in a price-sensitive segment.