In the recent GST council meeting on December 21, Finance Minister Nirmala Sitharaman announced a significant change in the Goods and Services Tax (GST) system for the sale of old and used cars. Previously, the GST rate on these transactions varied between 5% and 28%, but now there will be a uniform 18% GST rate on the sale of all used vehicles sold by GST-registered dealers. This change has raised some concerns and confusion, particularly with many people speculating that sellers will have to pay tax on their losses. Let’s take a closer look at what this new GST rate really means and clarify some of the misconceptions.
Who Does This Rule Apply To?
This new 18% GST rule applies exclusively to GST-registered dealers—businesses or companies that buy and sell used cars. It does not apply to individuals selling cars privately. So, if you are purchasing a used car from a platform like Cars24, Spinny, or any other GST-registered dealer, you will likely see an 18% GST included in the final price.
For example, if a GST-registered dealer buys a used car for ₹10 lakh and sells it for ₹12 lakh, the dealer makes a ₹2 lakh profit. The 18% GST will be levied on this ₹2 lakh profit, amounting to ₹36,000.
However, if you are buying or selling a used car between private individuals (i.e., without involving any GST-registered dealer), GST does not apply.
What Does This Mean for Buyers?
As a consumer, buying a used car from a GST-registered dealer may result in a slightly higher price, as the 18% GST will be included in the final bill. However, it is important to note that this is not an entirely new tax. It’s simply a revision of the GST rate on used cars that previously ranged between 5% and 28%, depending on the type of vehicle.
For buyers, the impact will mostly be seen when purchasing from a GST-registered dealer or platform. If you’re buying directly from an individual, you will not have to pay the GST.
Is This a New Tax?
No, this is not a new tax. It’s an adjustment to the existing GST rates for used cars. Previously, some used cars were taxed at a 12% GST rate, but this has now been increased to a uniform 18%.
The new GST rate applies to:
- Electric Vehicles (EVs)
- Petrol vehicles with an engine capacity of 1200 cc or more and a length of 4000 mm
- Diesel vehicles with an engine capacity of 1500 cc or more and a length of 4000 mm
- SUVs
While the tax rate has increased, the change is not something that has been introduced recently—it’s simply a standardization of the rate.
What if the Margin Has Been Negative? Does GST Apply to Losses?
One of the biggest misunderstandings regarding this new GST rule is that sellers might have to pay tax on a loss. This is incorrect. GST is only applicable to profits made by the dealer. If the dealer sells a used car at a price lower than its depreciated value, resulting in a loss, no GST is levied.
Here’s an example to clear up this confusion:
- Car’s purchase price: ₹15 lakh
- Car’s depreciated value: ₹12 lakh
- Car’s selling price: ₹10 lakh
In this case, the margin is negative: ₹10 lakh (selling price) – ₹12 lakh (depreciated value) = -₹2 lakh (loss). Since there’s no profit, no GST will be applied on this transaction.
A Brief History of Used Car GST Rates
The taxation of used cars has gone through several changes since the introduction of GST in 2017. Initially, used cars were taxed at a hefty 28% GST+cess, which led to industry pushback. In October 2017, the tax rate was revised to 18.2% for motor vehicles bought before GST was introduced. This meant that no tax credit could be claimed if the vehicle was sold or leased after GST came into effect.
In January 2018, the GST rate was further revised to 18% for all used vehicles, irrespective of whether they were bought before or after GST was implemented. With this latest change, all used cars sold by GST-registered dealers will now uniformly attract an 18% GST rate.
Key Takeaways on the 18% GST Rate for Used Cars
- GST Applies Only to GST-Registered Dealers: The 18% GST is applicable only to businesses or dealers registered for GST, not private individuals selling their used cars.
- Tax is Based on Profits, Not Losses: GST is charged on the profit margin, not on the overall sale price or losses incurred. If a car is sold at a loss, no GST is applicable.
- GST Rate Increased from 12% to 18%: The GST rate on used cars has been revised from 12% to a uniform 18% across all vehicles sold by GST-registered dealers.
We hope this clears up the confusion about the 18% GST on used cars! Share this article to spread awareness and help others understand how the new GST system works.