How GST Applies to the Sale of Second-Hand Cars?

The automobile industry in India is one of the largest sectors contributing to the economy, and the pre-owned car market is growing at a rapid pace. With more people choosing affordable mobility solutions, the sale of second-hand cars has seen significant growth over the past few years. In this evolving market, the Goods and Services Tax (GST) plays an important role in shaping the cost structure, compliance requirements, and overall competitiveness of the used car industry. 

Understanding how GST applies to the sale of used cars is essential for businesses, dealers, and even organizations that dispose of vehicles as part of their assets. This article explains the GST rules for used cars, applicable rates, valuation methods, exemptions, and compliance requirements in detail.

GST Applicability on Used Cars

Under the GST law, the sale of a used car is treated as a supply of goods if it occurs in the course or furtherance of business. This means:

• Dealers who buy and sell pre-owned cars need to charge GST on every transaction.
  
  
• Businesses that sell cars used as company assets may also need to comply with GST provisions, especially if input tax credit was claimed on the purchase of the vehicle.
  
  
• Individuals who sell their personal vehicles are not considered to be conducting business; hence, GST is not applicable in such cases.

This clear distinction ensures that GST is imposed only on business-related transactions and not on personal disposals.

GST Rates Applicable to Used Cars

Latest GST Rate on Used Cars (as per 55th GST Council Meeting)

GST Rate Increased: The GST on the sale of all old and used vehicles including electric vehicles (EVs) was increased from 12% to 18%, as recommended in the 55th GST Council meeting held on December 21, 2024

Applicable Margin Scheme: Importantly, this 18% GST is applied only on the margin, meaning the difference between the dealer’s purchase price and the selling price not on the total value of the vehicle

Effective for Registered Dealers Only: This change applies only to registered dealers or businesses. Transactions between private individuals (unregistered persons) remain exempt from GST

Uniform Across All Vehicle Types: Previously, only certain used vehicles (e.g., petrol cars above 1200 cc or SUVs) were taxed at 18%, while others were at 12%. The update now makes 18% the uniform rate for all categories of used vehicles, including EVs, when sold by registered dealers

The Margin Scheme for Used Car Dealers

To prevent the issue of double taxation, the government introduced the Margin Scheme for second-hand goods, including used cars.

Under this scheme:

• GST is charged only on the margin, i.e., the difference between the selling price and the purchase price of the car.
  
  
• If the margin is negative (the car is sold at a lower price than it was purchased for), no GST is payable.
  
  
• Input Tax Credit (ITC) is not available for dealers who opt for this scheme.

This approach ensures that tax is levied only on the value addition and not on the full transaction price. It reduces the burden on both dealers and buyers, thereby boosting demand in the pre-owned segment.

Sale of Used Cars by Individuals

For individuals selling their personal cars, GST provisions do not apply. Since such a transaction does not take place in the course of business, it falls outside the purview of GST.

However, in cases where cars are owned by businesses, such as corporate fleets or company-owned vehicles, the sale may attract GST. The applicability depends on whether Input Tax Credit was claimed at the time of purchase. If ITC was claimed, GST will be charged at the time of sale. If no ITC was claimed, the margin scheme can be applied.

This ensures that businesses follow compliance rules, while individuals are not burdened with unnecessary taxation.

Input Tax Credit (ITC) and Depreciated Vehicles

The treatment of ITC is one of the most critical aspects in the sale of used cars. Businesses that purchased vehicles for commercial use and availed ITC must pay GST when they sell these cars.

According to Rule 32(5) of the CGST Rules, the taxable value is determined either on the transaction value or under the margin scheme, depending on the circumstances. If depreciation has been claimed under the Income Tax Act, the sale value after considering depreciation becomes relevant for GST calculations.

This rule ensures that businesses that enjoyed the benefit of ITC at the time of purchase do not escape their tax liability when the asset is sold.

Compliance Requirements for Used Car Dealers

Dealers engaged in the sale of pre-owned cars must follow all GST compliance procedures, including:

• GST Registration: Mandatory if turnover exceeds the threshold limit prescribed under GST.
  
  
• Proper Invoicing: Issuing tax invoices in compliance with GST rules.
  
  
• Application of Margin Scheme: Charging GST only on the margin where eligible.
  
  
• GST Returns Filing: Reflecting sales, purchases, and tax liabilities accurately in GSTR-1 and GSTR-3B.
  
  
• Record Keeping: Maintaining detailed records of purchase and sale transactions to substantiate margin calculations.

Non-compliance can attract penalties, interest, and litigation, making it crucial for dealers to stay updated with GST regulations.

Benefits of GST Structure for the Used Car Market

The current GST framework has brought several benefits to the pre-owned car industry:

• Fair Taxation: By applying GST only on the margin, the burden of double taxation is eliminated.
  
  
• No Compensation Cess: Removal of cess has significantly reduced the cost of used cars.
  
  
• Encouragement to Buyers: Lower tax liability has made second-hand vehicles more affordable, boosting demand.
  
  
• Industry Formalization: With compliance requirements in place, the used car industry is moving towards greater transparency and organization.

These benefits have strengthened the used car ecosystem, contributing to increased sales and greater participation from both buyers and sellers.

Conclusion

The GST framework for the sale of used cars strikes a balance between revenue generation for the government and affordability for consumers. While individuals selling personal cars are exempt, businesses and dealers must comply with the rules, particularly the margin scheme and ITC provisions. The removal of cess and the rationalization of rates have provided much-needed relief to the pre-owned vehicle market, encouraging growth in this segment.

By ensuring tax is levied fairly and transparently, GST has not only simplified compliance but also helped strengthen India’s growing used car industry.