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GST Council Revises Tax Policy on Used Cars
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.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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