GST on used vehicles to vary by selling enterprise’s nature of biz

GST is not applicable if one individual sells it to another. HT

The Goods and Services Tax (GST) on used vehicles will depend on the selling enterprise’s nature of business, officials and experts clarified.  That would mean the tax will be different for enterprises which use cars for their business operations from those that use them as stock in trade or as inventory -- for example, a used car dealership. 

The GST Council last week recommended harmonising the tax rate on used cars at 18%, which meant the rate for used small cars, including electric vehicles moved up from 12%. It applies only on the margin of the selling enterprise.

GST is not applicable if one individual sells it to another.

An official explained that in cases where businesses with GST registration have claimed depreciation under the Income Tax Act, the margin on the sale on which GST is applicable would be the difference between the selling price and the depreciated value of the car. 

These are instances where a company sells cars which were used for business purposes and were part of their capital assets. Depreciation is allowed only on capital assets under section 32 of the Income Tax Act, not on inventory held by businesses.

On the other hand, a used car dealership will have to pay 18% GST on its margins, which is the difference between the selling price and purchase price of the vehicle. However, where margins are in the negative, no GST is payable, said the official, who spoke on condition of not being named. The Council’s decision to prescribe a single GST rate on sale of all old and used vehicles including EVs at 18% was a measure of simplification, the official said. 

Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm, explained that only those taxpayers who have not claimed any depreciation under the tax laws will be required to pay tax on the sale consideration minus the purchase price. The 18% tax on used vehicle sales replaces the earlier system of two rates where margins on sale of small cars were liable to a 12% GST and margins on sale of larger vehicles based on engine capacity and length, were subject to 18%.

Where the used vehicles are classified as inventory (stock-in-trade), such as those sold by second-hand EV dealers, GST is calculated on the margin, that is, the difference between the sale price and purchase price, provided Input Tax Credit (ITC) has not been availed on the purchase of the vehicle, explained Priyal Shah, partner, GST advisory at NPV & Associates LLP.

“If input tax credit has been availed, GST is applied on the entire sale price, as per general GST provisions,” explained Shah.