How The GST Hike On Used Cars Will Impact Your Wallet

Post the recent GST council meeting the internet has been full of memes on FM Nirmala Sitaraman imposing a higher GST on caramel popcorn as compared to salted popcorn. However, while that is the stuff of memes, another quite significant announcement, especially when it comes to second-hand cars. 

What Has Changed 

The GST Council, in its meeting at Jaisalmer, has approved an increase in the GST rate from 12 per cent to 18 per cent on the sale of all used cars, including electric vehicles. Prior to this announcement, there was a GST of 18 per cent on the sale of certain used cars with specific engine sizes, capacity i.e. 1200 cc/ 1500cc or more, and dimensions (based on length). 

“Electric vehicles were not subjected to the 18 per cent rate and were taxed at 12 per cent. Similarly, petrol, diesel, and CNG vehicles with engine sizes smaller than 1200 cc and not exceeding the length dimension specified were also taxed at 12 per cent. Now with a uniform rate of 18 per cent proposed across all types of transactions of sale involving used cars, the GST Council has proposed to reduce the discrepancy in taxation of used cars,” says Siddharth Surana, a Mumbai-based Chartered Accountant. 

Here, we will take a look at how changing the GST rate on used cars will affect second-hand car buyers. 

Further, as per the CGST rules, the rate of 18 per cent will continue to apply on the Value that represents the margin of the supplier, that is, the difference between the purchase price and selling price (depreciated value if depreciation is claimed) and not on the value of the vehicle. Also, it is not applicable in the case of unregistered persons, as has been suitably clarified in the Press Release issued by the GST Council.

“Thus, with this clarification, it is abundantly clear that private transactions (i.e. between unregistered persons)  involving the sale of used cars will not attract GST. In other words, GST will only apply where the GST-registered dealer or marketplace is selling a used vehicle,” says Surana. So if you are buying your second-hand car from an online platform or through a registered dealer. 

How GST Will Affect The Price Of Second-Hand Cars 

GST on the sale of second-hand cars shall be charged by the dealer or marketplace that is registered. This GST will be calculated on the margin of the supplier i.e. the difference between the purchase price and the selling price. “It needs to be clarified that GST at 18 per cent will not be applicable on the full sales value of the vehicle and will be levied only on the difference between the sale value and purchase price. Also, if the dealer spends any amount on the improvement of the vehicles, the amount spent cannot be reduced to calculate this margin of the supplier,” says Surana.  

Let us explain this with a simple example. Suppose a car dealer buys a car for Rs. 10 lakh, spends an additional Rs 2 lakh on its repairs and maintenance post-purchase, and then sells the vehicle for Rs 15 lakhs, in this case, the margin of the supplier will be Rs 5 lakh. Thus, GST at 18 per cent will apply on Rs 5 lakh. In respect of the amount of Rs 2 lakh spent on repairs, these cannot be added to the purchase Price.

Another situation can arise that suppose the registered dealer has claimed depreciation under the Income Tax Act on the used vehicle. Let us say the depreciation claimed is Rs 1 lakh. In this case, the purchase price as per GST rules will be the depreciated value of the asset i.e. Rs 10 lakh less Rs 1 lakh = Rs 9 lakh. Thus, the margin of the supplier will now be Rs 6 lakh because of the reduction of depreciation claimed from the purchase price. Accordingly, the GST at 18 per cent will now apply to Rs 6 lakh.    

Does This Make Buying A Second Car Less Attractive? 

“In our opinion, the GST Council Meeting announcement about used cars seeks to harmonise the GST rate on all types of used cars being sold in the market. Earlier, Electric vehicles and certain cars with specified engine capacity and dimensions were being taxed at 12 per cent. The increase in the GST rate on such vehicles will make these used vehicles costly. The registered dealers would be required to shift the burden of six per cent additional GST on the end customers, and this will end up making these used vehicles costly for the end consumers.” says Surana.  

The incremental GST liability could affect the demand-supply dynamics for such used cars and may have some negative impact on the registered used car dealers and marketplaces. On the other hand, harmonising tax rates for all types of used vehicles including SUVs and cars with higher engine capacity may also influence consumer behaviour positively in favour of SUVs/ higher engine capacity vehicles.