DH Deciphers | What do the GST Council’s new rules on used vehicles mean?

Bengaluru: On December 21, the Goods and Service Tax (GST) Council announced changes in the GST rates on the sale of old and used vehicles from the current 12 per cent to 18 per cent.

This will be applicable for all old vehicles, including electric vehicles (EV). This announcement triggered a lot of speculation and confusion on the possible application of these rates. In this edition of DH Deciphers, Sonal Choudhary breaks down the new tax rates and how they will affect the resale market.  

What are the recommendations of the 55th GST Council meeting on the sale of old and used vehicles, including EVs? 

The Council, on Saturday, recommended a single rate of GST on sale of all old and used vehicles, including EVs, at 18%, which was levied at 12 per cent earlier. The GST Council has not recommended imposition of new tax on the same, rather has increased it. 

Who will be liable to pay GST on the sale of old and used vehicles?

Only registered entities and businesses involved in the purchase and selling of old and used vehicles will be liable to pay the increased GST of 18 per cent, up from the previous rate of 12 per cent. Conversely, individuals conducting such transactions among themselves, or a private vehicle owner selling their car will not be required to pay GST.

When is GST payable on the sale of old and used vehicles? 

Where the registered person has claimed depreciation under Section 32 of the Income Tax Act 1961, GST is payable only on the value representing the margin, that is the difference between purchase value and the depreciated value of such goods on the date of supply. Where such margin is negative, no GST is payable. 

For example, if a registered business is selling a used vehicle at Rs 10 lakh, where the purchase price of the vehicle was Rs 12 lakh, then they are not required to pay any GST as the margin of the supplier is negative in this case. 

In cases where the purchase price of the vehicle was Rs 20 lakh, and the selling price is Rs 22 lakh, GST will be payable on the margin of supplier, that is, Rs 2 lakh. 

Who is most likely to be impacted by the increase in these GST rates?

The increase in GST rates of sold and used vehicles is expected to adversely impact the growth of trade through formal and online channels, according to a survey from LocalCircle which was released on Monday.

As per the survey, 42 per cent of used car consumers or sellers conduct transactions through unofficial channels and that number is expected to shoot up following the Council’s decision. The businesses of resale platforms, such as Spinny, OLX auto, CarDekho, or the second-hand sales channels of automakers, like Hyundai Promise and Maruti True Value, are the ones which are likely to be impacted. In such a case, the additional tax burden is likely to be transferred onto the end customers buying used cars.

How much is India’s current car resale market? 

India’s used car organised market, which is $32.44 billion, is expected to more than double to $73 billion by FY28, according to the Indian Blue Book report by CarandBike and Das WeltAuto. 

The demand for pre-owned luxury cars has been rising at around 35-40 per cent on a year-on-year (YoY) basis as owners of luxury cars usually sell off their vehicles after a year or two and upgrade to better models, stated Mordor Intelligence.