Levy of GST on old and used refurbished car

The GST landscape for old and refurbished cars has undergone significant changes, simplifying tax compliance for dealers and buyers alike. With the 55th GST Council meeting introducing a uniform 18% GST rate on used vehicles, the tax structure now focuses on profit margins rather than the entire sale value. This shift clears misconceptions like "tax on losses" and ensures fairness in the second-hand car market. 

As a business owner or buyer, understanding GST rates, HSN codes, and key rules is essential to navigate this evolving framework. In this article, we’ll explore everything from applicability to recent updates and practical scenarios for GST on used cars.

Understanding GST on Used Cars

Levy of GST on used cars is based on the taxable event called as supply. The definition of supply under includes all kinds of sale, exchange, transfer, barter, lease, rental, license and disposal undertaken for the furtherance of business consideration. Thus, the two important elements of supply are:

1. Consideration
2. Furtherance of business

A transaction is not considered a sale if the above two elements are not satisfied. 

The sale of old cars or used cars (resale of cars) is considered taxable under GST. It is pertinent to note that if such private resale happens between two individuals, then it is exempt from GST (not taxable).

Applicability of GST on the Sale of Old Cars

The table below illustrates the applicability of GST on the sale of old cars:

GST implications for various used car sale scenarios

GST Rates and HSN Codes for Used Cars

The GST rate on cars varies from nil to 28% depending upon their use and type. Under GST, there is no distinction between new goods and second-hand goods. Thus, the same GST rates were applicable on the sale of old cars as applicable on the sale of new cars. However, vide Notification No. 8/2018- Central Tax (Rate), the GST rates on the sale of old cars were reduced as follows:

The Government has exempted Compensation cess on sale of old/ used motor vehicles vide Notification No. 1/2018- Compensation Cess if the seller has not claimed ITC.

Key GST Rules

Valuation of supply of used cars or old cars is important for taxpayers to know. Margin scheme is available for dealers engaged in selling and purchasing old cars. GST is applicable only on the differential margin between the sale price and purchase price of second-hand cars as per the scheme. But, if the differential amount is negative, then the same shall be ignored.

Suppose a registered person has claimed depreciation as per section 32 of the Income Tax Act. In that case, the supply value for the supplier shall be the difference between the sum received for supply and the depreciated value of the car on the date of supply.

If there is any value addition to the car by way of repair or refurbishment, then the value of such addition shall be summed to the value of goods and should form part of the margin.

For example: 1) If a dealer sells two cars and makes a profit of Rs.25,000 on one and a loss of Rs.10,000 on another, he needs to pay tax only on Rs.25,000. The negative amount shall be ignored.

2) If a dealer purchases a car for Rs.50,000 and incurs refurbishment charges of Rs.5,000 and then sells the car for Rs.65,000, then GST is payable on Rs.10,000 (65,000-55,000).

Recent Updates for Used Cars

As per update on 16th January 2025, the GST rate on old and used cars, including electric vehicles (EVs), has been increased from 12% to 18%. This change standardises the tax system for used cars sold by businesses and dealers.  The new uniform rate could increase the prices for used cars sold by GST-registered dealers, potentially impacting affordability in the second-hand market, especially for EVs.

It was also clarified that individual private sellers since GST does not apply to transactions between individuals which clearly demarcates taxability of GST for sale of old cars between business and personal use.

Input tax credit claims

If a dealer purchased a used car from another registered dealer, then GST is collected and paid by the selling dealer. Thus, the GST paid by the purchasing dealer can be claimed as input tax credit as per normal ITC rules. 

However, section 17(5) disallows ITC on certain motor vehicles. As per this section, ITC is unavailable on vehicles used for transportation of persons with a seating capacity less than or equal to 13 persons, including the driver. Input tax credit (ITC) can be claimed only if the motor vehicles are used for the following purposes:

1. Car given to employees for business use: ITC can be claimed on motor vehicles used only for business purposes. But, if the car is given to an employee for personal use, then ITC on the same cannot be claimed.
2. Demo cars: Demo cars are not purchased by the car dealers for resale. Thus, they can be treated as capital assets, and ITC can be claimed.
3. Renting a car: ITC can be claimed on all goods and services used in the course of furtherance of business. ITC can be claimed for the renting of motor vehicles with a seating capacity greater than 13 persons as per section 17(5). Thus, the employer can claim ITC on GST charged by the service provider if the seating capacity is greater than 13 persons.
4. Transport business: If an entity is purchasing cars for transportation of passengers, then it can claim ITC on such vehicles. 

Negative Margins on Used Cars: Is GST Still Applicable?

GST applies on the sale of used cars only if there is a positive margin. In other words, the selling price is more than the purchase value of the vehicle (or depreciated value). 

If the margin is negative (being a loss on the sale), then GST does not apply. This rule applies to registered dealers who are involved in the sale of used vehicles. 

For example, if a dealer sells a used car for Rs.15 lakh that was originally purchased for Rs.25 lakh with a claimed depreciation of Rs.8 lakh, resulting in a negative margin of Rs.7 lakh, no GST would be charged on this sale of used car.