The GST Council has proposed an increase in the tax rate to 18% on the margin of used car sales, which now includes electric vehicles (EVs) as well as specified petrol and diesel cars. This recommendation was made during the GST Council meeting held on Saturday.
As per the GST rules, the 18% GST slab is applicable to electric vehicles (EVs) as well as petrol cars with an engine capacity exceeding 1,200 cc or a length exceeding 4,000 mm. Additionally, diesel cars with an engine capacity over 1,500 cc or a length exceeding 4,000 mm, and SUVs are also subject to this tax rate. Previously, various GST rates applied to the sales of used vehicles and EVs. This move by the government is to standardise the tax rates is aimed at simplifying the tax system.
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This rule regarding GST is not new, as transactions of this nature have previously incurred a 12% GST charge. Cars with smaller engine capacities and lengths will continue to be taxed at the current rate of 12% GST. Transactions between non-GST registered individual sellers will be exempt from this tax. This exemption applies to all categories of cars.
When buyers acquire a pre-owned vehicle through platforms like CarDekho, OLX, showrooms, or dealers, a GST of 18% will be applied. For instance, if a used car platform buys a small car for Rs 1 lakh, performs repairs, and subsequently sells it for Rs 1.4 lakh, the 18% GST will be levied on the profit margin of Rs 40,000 earned.
How will be GST calculated on old or used cars
For instance, if a registered individual sells a used vehicle for Rs 10 lakhs with a purchase price of Rs 20 lakhs and claimed depreciation of Rs 8 lakhs, no GST is required as the supplier's margin is negative due to the difference between the selling price and the depreciated value.
However, if the selling price is Rs 15 lakhs with a depreciated value of Rs 12 lakhs, GST at 18% will be payable on the supplier's margin of Rs 3 lakhs, amounting to Rs 54,000.
According to Pankaj Jain, Tax Partner from EY India, GST will be applied at a rate of 18% on the calculated value using the following formula, regardless of the size or type of the car. The formula is as follows: Sale price minus Purchase value (after deducting depreciation as per the Income Tax Act). If the resulting value is negative, no GST will be due. However, this applies only if the seller of the car is not claiming any Input Tax credit on the purchase of the vehicle.
Dealers engaged in the buying and selling of used cars can leverage the 'margin scheme' provided by the GST regime. This scheme allows dealers to pay GST only on the profit margin earned from the sale of a car, rather than on the full selling price. If dealers choose not to claim input tax credit on the purchase of the cars, they can benefit from this scheme.
In cases where the margin is negative, meaning the dealer is selling the car at a loss, no GST is payable. This scheme provides a simplified and potentially cost-saving option for dealers in the used car market.
How will businesses be impacted
There is a possibility that a business may be claiming depreciation on the purchase of a car. As per the Income Tax Act of 1961, depreciation can be claimed using the written-down value (WDV) method. This method involves deducting a specified percentage of the car's value each year to reduce its price. For example, if a car is valued at Rs 10 lakh in 2023 and the rate of depreciation is 10%, its value should be Rs 9 lakh in 2024. The calculation for this would be: 10 lakh - 10% of 10 lakh = 9 lakh.
When claiming depreciation, GST will be charged on the difference between the sale value and the depreciated value. If depreciation is not claimed, GST will be charged on the difference between the sale value and the purchase value. If the margin is zero, no GST is applicable. The supplier is responsible for charging and the consumer ultimately bears the GST.