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The second-hand vehicle market is almost as popular as brand-new automobiles. However, many buyers do not fully understand how GST applies when purchasing a second-hand car from an individual or dealer. It is important to know the GST rate, who needs to pay it, and the dealer’s margin.
The tax implications vary based on whether the seller is a registered dealer or a private individual. Buyers also need to consider the impact of GST on loan calculations and resale value. Understanding these details is essential to calculate the total cost accurately and make well-informed payment decisions.
GST applies to used car sales, but the process differs from new car sales. For new cars, sellers charge GST on the entire price at the time of purchase.
In contrast, used car sales follow the margin scheme, where GST is applied only to the profit margin, not the full selling price. This system ensures that the tax burden is lower on used cars compared to new ones, benefiting both buyers and sellers.
Before discussing the GST on used cars, it is important to understand a few key rules:
Margin Scheme
Sellers charge GST only on the profit margin, not on the full selling price. This means GST applies to the difference between the buying and selling prices of the used car.
GST Rates on Used Cars
The Goods and Services Tax Council has set a uniform 18% GST rate on all second-hand vehicles. Previously, rates varied between 5% and 28%, but this change simplifies the taxation process.
Input Tax Credit (ITC)
Sellers cannot claim ITC when selling used cars under the margin scheme. Typically, businesses receive credit for the GST paid on inputs, but this is not applicable to the sale of second-hand vehicles.
The applicability varies depending on the seller's usage type and their registration status. Below are the details to help you understand better:
Unregistered Sellers
Unregistered individuals do not need to collect GST when selling a second-hand car. These sales are exempt from GST.
Registered Sellers
Registered dealers have to charge GST when selling a used car. This is because they regularly buy and sell used cars as part of their business. GST rules classify these sales as the supply of goods, and the applicable tax is levied.
The 18% GST rate applies to GST-registered dealers, including businesses and companies involved in the buying and selling of used cars. This rule covers all entities operating within the resale market, which implies taxation on second-hand car sales.
The table below illustrates how GST applies to the sale of used cars in various scenarios:
Seller’s Usage Type |
Seller Type (registered/unregistered) |
Buyer Type (registered/unregistered) |
GST Applicability |
|---|---|---|---|
Business |
Unregistered |
Unregistered |
No |
Business |
Unregistered |
Registered |
Yes |
Business |
Registered |
Unregistered |
Yes |
Personal |
Unregistered |
Unregistered |
No |
Car Dealer |
Registered |
Unregistered |
Yes |
The GST rate on used cars is now set at 18% for all second-hand vehicles, including petrol, diesel, and electric cars. Previously, the tax rate differed based on the vehicle type and the seller’s registration status.
The new rule applies only to GST-registered dealers and is applicable solely to their profit margin, not the full selling price. No GST applies if a dealer sells a vehicle at a loss.
The updated GST rules for used cars include the following key points:
Sellers are required to charge a fixed 18% GST on all used cars, including petrol, diesel, and electric vehicles (EVs)
Dealers pay GST only on their profit (sale price minus purchase price)
Individuals selling their old cars are not required to pay GST. Only GST-registered dealers are authorised to charge it
Dealers may increase prices to cover the 18% GST, resulting in higher costs for buyers
GST-registered dealers are required to charge 18% GST on used car sales. This regulation applies to all entities within the resale market, including companies involved in the purchase and sale of second-hand cars.
Purchasing a used car from a GST-registered dealer or platform may cost more, as buyers need to pay 18% GST. This tax applies to the dealer’s profit margin. Popular online platforms dealing in second-hand cars include this tax in the final bill for transparency.
Buyers do not have to pay GST when selling directly to another individual. This transaction remains tax-free, as the revised rule applies GST only to dealers, not private sellers.
This is not a new tax but a revision of the GST rate on used cars. The rate has been standardised at 18%, increasing from 12% for certain vehicles. This applies to:
Vehicle Type |
GST Applicability |
|---|---|
Electric Vehicles (EVs) |
Applies regardless of engine type |
Petrol Cars |
Applies if engine capacity is 1200 cc+ and length exceeds 4000 mm |
Diesel Cars |
Applies if engine capacity is 1500 cc+ and length exceeds 4000 mm |
SUVs |
Applies based on size and engine power |
GST applies only to profit, not losses. When a dealer sells a used car for less than its depreciated value, they do not have to pay GST.
Consider the following example:
Purchase Price: ₹12 Lakhs
Depreciated Value: ₹10 Lakhs
Selling Price: ₹8 Lakhs
Margin: ₹8 Lakhs - ₹10 Lakhs = (-₹2 lakhs) (a loss)
As the dealer incurs a loss, no GST is charged. This rule ensures that businesses do not pay tax on old car sales.
According to the new rule, GST applicability depends on the type of seller:
Registered Dealers: They have to pay 18% GST on their profit, not the full price, and can claim Input Tax Credit (ITC)
Non-Registered Dealers: Occasional sales do not attract GST, but regular sales may require GST registration
Private Sellers: GST does not apply unless they sell cars as a business
The change in taxation has a significant impact on the used car market. Below is a table outlining tax applications in different scenarios:
Type of Sale |
GST Applicability |
|---|---|
Business Sales (Dealers) |
18% GST on profit margin if registered under GST |
Individual Sales |
No GST unless sold by a registered dealer |
Auction Sales |
18% GST if sold by a registered dealer; no GST if unregistered |
Car Dealership Sales |
18% GST on profit margin under margin scheme; no ITC |
Sales to Exporters |
No GST if exported, subject to compliance |
The government has revised the GST on used car sales over time to address industry concerns and market trends:
Date |
GST Rate and Charges |
|---|---|
Before 12th Oct 2017 |
28% GST + cess |
13th Oct 2017 |
18.2% for pre-GST vehicles |
24th Jan 2018 |
12% GST for smaller vehicles and 18% for larger vehicles |
Current Rule |
18% GST on all used cars sold by registered dealers |
Some key points of the new rule to remember when selling a second-hand vehicle are:
GST on used cars applies only to registered dealers, not private sellers
Tax on profits is not applicable under GST if the vehicle is sold at a loss
The revised GST rate has increased from 12% to 18% for consistency
No, GST applies only to a registered seller. If both buyer and seller are unregistered, the transaction is GST-free.
No, a sale between two non-registered individuals does not attract GST. This applies to all second-hand vehicles.
A registered seller dealing in second-hand cars has to pay 18% GST. This applies regardless of the vehicle type.
The GST rate for all used vehicles, including EVs, is now 18%. This was increased from 12% in the 55th GST Council meeting.
Sellers need to pay GST only on the profit margin of used car sales, not the full price. Consider the following example
A used car is purchased for ₹12 Lakhs
It is later sold for ₹14 Lakhs
The profit margin on the sale is ₹2 Lakhs
GST applies only to ₹2 Lakhs, not the entire selling price of ₹14 Lakhs, reducing the overall tax burden
The GST notification on used car sales explains how GST applies to used vehicles. It covers:
The margin scheme
Specifies when GST is applicable
Details of any exemptions or reductions
When selling a vehicle to an individual, you do not need to collect GST on the sale. Person-to-person transactions are typically exempt from GST charges under the new rule.
GST applies only to the profit margin, which is the difference between the sale and purchase price of second-hand cars. When the margin is negative, GST is not charged.
Registered sellers have to collect 18% GST on the sale of a used car unless it is sold at a loss.
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