GST on Old Used Cars: Tax Imposed Only When Sale Price Exceeds Depreciated Value

A registered seller must pay GST on the sale of old and used vehicles only if they make a profit, meaning the selling price exceeds the depreciation-adjusted cost. The GST Council recently decided to apply a uniform 18% rate on all old and used vehicles, including electric ones, which were previously taxed at varying rates. If an individual sells a used car to another individual, GST does not apply.

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GST Application on Vehicle Sales

For registered sellers who have claimed depreciation under Section 32 of the Income Tax Act, GST is owed only on the profit margin. This margin is the difference between the sale price and the depreciated value at the time of sale. If this margin is negative, no GST is due. For instance, if a vehicle bought for Rs 20 lakh and depreciated by Rs 8 lakh is sold for Rs 10 lakh, no GST applies since the margin is negative.

In another scenario, if the same vehicle's selling price is Rs 15 lakh with a depreciated value of Rs 12 lakh, GST will be charged on the Rs 3 lakh margin at 18%. In cases where no depreciation claim exists, GST is calculated on the difference between selling and purchase prices. For example, if a vehicle bought for Rs 12 lakh is sold for Rs 10 lakh, no GST applies due to a negative margin.

Impact on Electric Vehicles and Small Cars

EY Tax Partner Saurabh Agarwal noted that the GST Council has proposed raising GST from 12% to 18% on old and used EVs and small fossil fuel cars. This aligns their tax rate with larger vehicles and SUVs. Importantly, GST will be levied only on margins rather than full sale values or purchase prices minus depreciation costs.

Before this change, second-hand EVs were taxed on their entire sale value. The amendment could lower costs for second-hand EVs as long as margins remain below 27.78% of purchase prices. However, it might increase costs for small fossil fuel cars by up to 1.5%, assuming margins range from 10-25%.

Government's Environmental Vision

This proposal aligns with government efforts to curb pollution from the expanding second-hand car market. AMRG & Associates Senior Partner Rajat Mohan mentioned that while EVs benefit from government incentives, higher resale GST might deter cost-sensitive buyers, affecting EV penetration in secondary markets.

Dealers must now maintain precise transaction records to comply with these changes. Although this revision could enhance government revenue, it requires businesses to adapt and consumers to understand its impact on resale pricing.