GST applies to automobiles, including cars. This article throws light on the applicability of GST and tax rates on the sale of old and used refurbished cars.
Scope of supply
Supply is considered a taxable event under GST. The definition of supply 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:
- Furtherance of business
A transaction is not considered a sale if the above two elements are not satisfied.
The table below illustrates the applicability of GST on the sale of old cars:
|Usage by seller||Is the seller registered?||Is the buyer registered?||Applicability of GST|
|Business||No||Yes||Yes on a reverse charge basis|
Tax rate and HSN code
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:
|Description||HSN code||GST||Compensation cess|
|LPG/ CNG vehicles with engine capacity not exceeding 1200cc and length not exceeding 4000mm||8703||18%||1%|
|Diesel vehicles having engine capacity not greater than 1500cc and length not greater than 4000mm||8703||18%||3%|
|Engine capacity greater than 1500cc||8703||If the seller did not claim ITC: 18%|
If the seller has claimed ITC: 28%
|SUVs (Engine capacity greater than 1500cc)||8703||If the seller did not claim ITC: 18%|
If the seller has claimed ITC: 28%
|Electric vehicles (both two and three-wheeled)||8703||5%||Nil|
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.
Valuation of supply
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).
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:
- 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.
- 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.
- 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.
- Transport business: If an entity is purchasing cars for transportation of passengers, then it can claim ITC on such vehicles.
Who is liable to pay GST in the sale of used cars by the Government?
- Sale to a registered person: In such case, the registered taxpayer must pay GST under reverse charge vide Notification No. 4/2017- Central Tax (Rate).
- Sale to an unregistered person: In such case, the respective Government Department shall obtain GST registration and pay tax.
What is the value of supply on which GST is applied?
The value of supply is the difference between the sale and the purchase price:
-Depreciation is availed: The margin of supply is the gap between the sale price and the depreciated value of the car as on the date of supply. If such value is negative, then it is to be ignored.
-Other cases: It is the difference between the selling price and the purchase price, and if the same is negative, it shall be ignored.