The government of India came up with the Goods and Services Tax (GST) in order to prepare a uniform tax structure. The GST was implemented in 2017 and thus came a single tax system that replaced many direct and indirect taxes.
This was pretty good news for the new car market but calculating the tax on used cars became pretty complicated. Before GST on used cars came into effect, used car dealers used to pay 5 percent VAT on any transaction. With the new taxation, as much as 28 percent tax started getting levied on used cars.
As we said, GST came in as a uniform tax structure that integrated various direct and indirect taxes. However for calculating GST on cars, three categories were made –
1. Small cars: For small cars measuring less than 4-metre in length and with engine size of less than 1200cc/1500cc (petro/diesel), there was a tax of 18 percent. This was lower than the 28 percent total tax one would pay earlier on a vehicle from this category.
2. Mid-size cars: Mid-size cars such as Tata Nexon and Honda Amaze attract a tax of 18 percent.
3. Luxury cars: Luxury cars from brands such as Mercedes Benz, BMW & Audi as well as supercars from Lamborghini and Ferrari attract a tax of 28 percent.
The launch of GST taxes on cars was largely beneficial for the consumer as well as the dealerships and carmakers. The implementation has been beneficial for the consumer, dealer, as well as the manufacturer.
The impact of GST on used cars wasn’t as straightforward. So, allow us to try and explain on basis of several categories through the table below –
|Types of Used Cars||GST on Used Vehicles||Compensation Cess||Total Applicable Cess|
|Petrol Car with engine capacity up to 1200cc||12%||Nil||12%|
|Petrol Car with engine capacity over 1200cc||18%||Nil||18%|
|Diesel Car with engine capacity up to 1500cc||12%||Nil||12%|
|Diesel Car with engine capacity over 1500cc||18%||Nil||18%|
*The above list is indicative and subject to periodic change.
Initially, tax on used cars was the same as on new cars. However, these rates were later reduced to boost the sale of second-hand cars. Currently, GST on used cars is decided on the basis of the category they fall in.
It is 12 percent for small petrol cars with engine size of up to 1200cc and diesel cars of engine size up to 1500cc. The GST taxes on used cars with engine size bigger than 1200cc for petrol and 1500cc for diesel has been fixed at 18 percent.
The reduced tax on used cars with the arrival of GST has surely given a boost to the second-hand car market. There has been, in fact, a significant drop from the 28 percent tax levied earlier. Also, it’s worth noting here that the compensation cess on all second-hand cars was completely abolished.
The value on which GST on used cars is calculated is basically the margin of supply value. In the case of second hand models, the tax calculation is based on the below situations-
1. In case the used vehicle is sold by the Central or the State Government, UT government or a local authority, the buyer needs to pay tax.
2. In case a business person uses a vehicle for business purposes and the aggregate turnover is less than the threshold exemption limit of 40 lakhs, then a GST registration may not have been required. So, if the turnover of the old car is higher than the threshold exemption limit, no GST would be payable.
From the above, it can be inferred that the introduction of the GST has been beneficial for all the parties involved in the process – be it carmakers, be it customers or be it the used car dealers. It’s also pretty clear that GST would boost the automobile sector in the long run.
That said, calculation of GST taxes on used cars is not as simple as that on new cars. Still, the second hand car market has reaped the benefits of this tax system, irrespective of the complexities involved.
A: In case the used car was for commercial activities, it is treated as a capital asset and tax is chargeable as long term or short term gain. However, if the vehicle is treated for personal use, it is not taken as a capital asset and does not attract any tax on sale.
A: A 12 percent GST on used cars is levied in case of small vehicles and 18 percent in case of bigger ones. There is no cess. But the important part here is that it is levied on the net amount gained –
“Margin of Supply shall be difference between sale price and purchase price, tax to be calculated on such margin, and where the margin of such supply is negative, it shall be ignored”
A: No, GST tax on cars in India can’t be refunded as per the provisions of Section 17-5 of the CGST act, which states that the input tax credit can’t be availed for motor vehicles.