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GST Council Revises Tax Policy on Used Cars

ICICIdirect Research 27 Dec 2024 DISCLAIMER

The Goods and Services Tax (GST) Council has approved an increase in the tax rate on used electric vehicles (EVs) as well as small cars sold (<4m) by businesses (dealers) from 12% to 18%.

All old cars sold in secondary market will now have a uniform GST rate of 18%. This change, announced during the council's 55th meeting, will apply only to the margin value i.e., the difference between the purchase and selling price of used EVs sold by businesses.
Importantly, individual sellers will remain exempt from GST. This is largely a non-event for the domestic auto industry.

The tax increase impacts various seller profiles - For example,
For individual sellers, such as a person who purchases a car for ₹ 20 lakh and sells it for ₹ 10 lakh, there is no GST liability. This is because the seller is an individual seller and the selling price is lower than purchasing price resulting in negative margin.

Conversely, for businesses the scenario changes wherein a company buys a car for ₹ 20 lakh, which depreciates to ₹10 lakh over 5 years and then sells it for ₹12 lakh, it must pay GST on the profit margin of ₹2 lakh. Under the new GST rate of 18%, the tax payable would amount to ₹36,000, an increase from ₹24,000 at the previous rate of 12%. This represents an additional tax burden of ₹12,000, representing 1% of the selling price. Also, if the vehicle is sold for less than ₹ 10 lakh, the GST payable is nil since margin is negative.

Car dealers which operate in buying and selling of cars will also feel the impact of this increase tax on their margins. For instance, such a person buys a second-hand car for ₹10 lakh and sells for ₹ 11 lakh, the GST payable in this case is 18% of ₹1 lakh (Margin) I.e., ₹18,000 which previously would be ₹12,000 at a tax rate of 12%, representing an increase of ₹6,000. This is less than 1% of vehicle selling price and remains minuscule.

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