GST on Sale of Used Car by Company to Employee

Purchasing a company car may provide a financial advantage for employees, though questions around GST on used cars often create uncertainty. Employees may find it difficult to determine the rates of GST applicable under the Indian GST and broader car taxation provisions. This article clarifies how GST applies to the sale of pre-owned cars purchased from a company by an employee.

Understanding GST on Used Cars in India

The sale of a used motor vehicle is considered taxable under the Goods and Services Tax (GST) in India. This includes sales between a company and its employees. The rules governing the sale of used vehicles are contained in rules issued under the GST Act, clarified by the GST Council. 

GST on a pre-owned car depends on the car’s purchase price, selling price, and whether input tax credit was claimed, under the GST regime for motor vehicles bought earlier.

When is GST Applicable on Used Car Sales?

A company must collect GST from buyers when they sell used cars. This applies to motor vehicle sales, including commercial vehicles used earlier for business purposes. 

Typically, when an employee buys a car from their employer, GST is included in the vehicle’s quoted selling price. It is the employer’s responsibility to ensure all GST rules are followed and to collect the proper amount of GST paid by the employee. Employees don’t have to register, calculate GST or file GST returns associated with the sale of the vehicle.

GST Framework for Sale of Used Cars

Under the GST policy for used cars, GST is levied on the margin where input tax credit was not claimed, and on the full selling price where credit was availed. Only the margin scheme reduces the tax burden on used vehicles.

Role of Input Tax Credit in GST Calculation

Input tax credit is the key factor in determining GST calculation on used car sales. If the company did not claim GST credit at the time of purchase, the sale may qualify for the margin scheme. This approach is also applied in dealer purchases, where GST is calculated on the dealer’s profit margin. 

When a company has previously claimed a GST credit, it must calculate GST on the full price of the car being sold. They cannot use the margin scheme in this instance, ultimately impacting the selling price of the car for the employee.

GST Rates on Used Cars

The amount of GST you pay for a used car depends on the tax rates applicable to the vehicle type, including second-hand cars. Most used cars will only have 12% GST compared to new cars, which will all pay a greater GST.

GST Rate Based on Engine Capacity and Fuel Type

Earlier, used petrol cars with engine capacity up to 1200 cc and diesel cars up to 1500 cc were taxed at 12% GST. At the same time, vehicles with larger engines attracted 18% GST. 

However, under the current GST framework for old and used vehicles sold by registered persons, GST is generally levied at 18% on the applicable value (usually the margin). This is irrespective of engine capacity, except for electric vehicles, which attract 5% GST.

GST on Electric Vehicles

When purchasing a used electric car, the buyer will be charged 5% GST, with no GST compensation cess. This applies to a normal buyer purchasing a used electric vehicle as well. The reduced rate is intended to promote electric vehicles (EVs) in the auto industry in India.

Compensation Cess on Used Cars

Certain categories of used cars, such as vehicles with higher engine capacity or SUVs, may attract GST compensation cess in addition to GST. It is calculated on the margin where applicable. Electric vehicles are exempt, so employees should confirm cess before finalising the purchase.

Sale of Used Car by Company to Employee

When a company sells a used car to an employee, the transaction is treated as a taxable supply of goods under GST law. These GST implications apply uniformly to such motor vehicle sales. The employer issues a Tax Invoice and reports it in GST Return Forms. The GST paid is a component of the selling price offered to the employee by the company.

The Employees must understand how GST influences their final purchase price for used vehicles. Employees are not responsible for ensuring compliance with GST rules. However, employees should ensure clarity surrounding whether or not GST and any related additional tax are included within their quoted price.  

Valuation of a used car sold by an employer follows GST margin scheme rules for GST and Rule 3 of the Income-tax Rules for perquisite purposes. This is because GST does not require fair market value. However, the income-tax law may scrutinise the sale price.

Income Tax Implications for Employees

Employees are directly impacted by the income tax implications of their employer's car sale. The income tax implications for employees arise when their employer sells them a vehicle for less than its depreciated value under income tax legislation. This commonly applies to old cars disposed of by employers.

What is a Taxable Perquisite?

A taxable perquisite is defined as a benefit given to an employee by their employer at a reduced price. When a company sells a car to an employee below its depreciated value, the difference becomes a taxable perquisite. If the vehicle is sold to the employee for an amount equal to or greater than the depreciated value, no perquisite is imposed.

What Employees Should Check Before Buying a Company's Used Car

Before making a purchase, employees should investigate important factors so they do not incur further costs or expenses.

To Conclude

Depending on the input tax credit, both the profit margin and the entire selling price are subject to GST on used car sales in India. Fuel, engine capacity, and vehicle type all affect rates; electric vehicles are not subject to the compensatory cess. Comprehending GST on used automobiles guarantees compliance in motor vehicle transactions and aids in managing tax obligations.

Companies usually require full payment at the time of sale. Employees generally favour not using their savings to buy the vehicle. This also helps manage the overall tax burden associated with GST on used vehicles. The 2nd hand Car Loan can help employees to take on an increased amount of monthly payments over an extended period.

Explore Poonawalla Fincorp’s Pre-Owned Car Loan to finance your used car purchase with flexible tenure options.

Read Also: Used Car Loan for 5–7-Year-Old Cars: Maximum Loan Amount and Eligibility

FAQs

Is GST applicable when a company sells a used vehicle to an employee?

If the employer is registered under GST and the consideration involved, then yes, GST is applicable.

Does the employee have to calculate or remit GST?

The employee is not responsible for calculating or remitting the GST, as the employer pays the GST. It is typically included in the final selling price.

Is GST applicable only to profit?

Yes, provided the employer has not claimed input tax credit on the sale, GST will apply only on the profit.

Are used cars subject to compensation cess?

Compensation cess may apply to certain used cars with higher engine capacity or SUVs. However, small cars and electric vehicles are exempt.

Are employees permitted to finance their purchase of a car used by the employer? 

Employees may obtain a Pre-Owned Car Loan to finance the purchase of a used car owned by the employer.