Demystifying GST on Second-hand Cars: Key Regulations for Selling

GST on second-hand cars is charged at 18% on the profit margin when a GST-registered dealer sells a used vehicle. If both the buyer and seller are GST-registered, the buyer can claim Input Tax Credit (ITC) on the tax paid, which allows them to recover the GST incurred. In case neither party is GST-registered, no tax applies. If only the buyer is registered, no tax is charged, and they cannot claim ITC. Continue reading to know more about this!

GST on Second-hand Cars in India

GST on second-hand cars was aligned with new-car rates in 2017 and later revised to promote the pre-owned car market. The previous GST structure featured rates ranging from 5% to 28% depending on vehicle type. This was later replaced with a standardised GST rate structure, as shown in the table below:

Also Read: GST Calculation for Secondhand Car Dealers

How is GST on Used Cars Determined?

The applicability of GST to a used-car sale depends on whether the seller has a GST registration. Let’s check the GST regulations under various scenarios:

GST Rules for Different Seller Types

Understanding the GST implications is crucial before entering the used car market. The rules vary significantly depending on who is selling the car and their GST registration status.

Individual-to-Individual: When an individual sells their own car to another individual, no GST is applicable. This is because such a transaction is not considered a “supply” under GST provisions, so the seller does not have to collect GST.

Individual to a Registered Business: If an individual sells a car to a business (e.g., a used car dealer), GST is generally not charged by the seller. If the buyer is GST-registered and the seller is not, the reverse charge mechanism applies, meaning the buyer will pay the GST directly to the government rather than the seller collecting it.

Business-to-Business: When GST-registered dealers sell pre-owned cars, they must charge GST. This applies whether the buyer is an individual or another business.

Example of GST Calculation on Used Cars

In India, GST on used cars is based on the profit margin, which is the difference between the purchase and selling price. Here are two examples:

Example 1: Selling a used car at a profit

Let’s say a dealer buys a used car for ₹5 lakh and sells it for ₹6.5 lakh. The margin will be:

Margin = Selling price – Purchase price

Margin = ₹6.5 lakh – ₹5 lakh = ₹1.5 lakh

In this case, the dealer makes a profit of ₹1.5 lakh. GST of 18% is applied to the profit margin:

GST = ₹1.5 lakh x 18% = ₹27,000

So, the dealer needs to pay ₹27,000 as GST on the profit made from the sale of the used car.

Example 2: Selling a used car at a loss

Suppose a dealer buys a used car for ₹7 lakh and sells it for ₹6.5 lakh. The margin here is:

Margin = ₹6.5 lakh – ₹7 lakh = (-₹0.5 lakh)

Since the margin is negative, the dealer is selling at a loss. In this case, no GST is charged as there is no profit.

For a clearer picture, here is how GST applicability works in various scenarios:

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Also Read: GST Calculation on Buying and Selling Used Cars

To Conclude

An 18% GST is applied only to the profit margin for GST-registered dealers under the Margin Scheme. Private sales between individuals are exempted, eliminating GST liability and easing the tax burden in the second-hand market. This framework ensures transparency in transactions for pre-owned cars, petrol vehicles, diesel vehicles, and electric vehicles (EVs), as outlined by the GST Council.

FAQs

How is GST on second-hand cars calculated in the used car market?

GST on the sale of used cars is calculated at 18% only on the profit margin for a GST-registered dealer and not on the entire sale price of the vehicle. This margin is the difference between the purchase price and the selling price under the Margin Scheme.

What is the GST rule applicable to private sales of used cars?

When an individual sells their personal car to another individual, no GST applies, as it is not considered a supply under the GST framework. However, a registered car dealer must collect and pay GST on their profit margin.

What are the GST rules for used electric vehicles (EVs)?

The GST rules for used electric vehicles (EVs) are consistent with those for petrol and diesel vehicles. A registered dealer must pay the applicable GST rate on the profit margin earned from the car sale, ensuring a uniform tax structure across the pre-owned car market.

Do you have to pay GST on second-hand cars when buying them?

GST on second-hand cars applies when purchased from a GST-registered dealer and is charged at 18% on the profit margin. If both the buyer and the seller are GST-registered, the buyer can claim Input Tax Credit (ITC).

What is the new rule for GST on cars?

Since December 2024, 18% GST has applied only to the profit margin when a GST-registered seller sells a used car. No GST is charged if the margin is negative (i.e., the car is sold at a loss), and individual-to-individual sales are exempt from GST. Only registered dealers are subject to this tax.