GST on used vehicles is applied differently to businesses compared to individuals.

New Delhi: The Goods and Services Tax or GST on used cars, it is learnt will differ based on the character of business selling the vehicle-from the one using for business operation to the used car dealer selling as a finished product.

This means it’ll be different for businesses using vehicles for operational purposes compared to businesses selling them as inventory.

Last week, the GST Council recommended unification of the GST rate for used cars at 18%. This increases the rate for used small cars, including electric vehicles, from 12%. The tax applies only to the margin of the selling business.

GST does not apply when one individual sells a used vehicle to another.

It will attract GST only on the margin, that is, sale price minus the depreciated value of the car, said an official. Where a business sells cars it had used in operations, as part of its capital assets, depreciation is allowed under the Income Tax Act and so can be claimed. Section 32 says depreciation is admissible on capital assets, not inventory.

Used car dealerships will pay 18% GST on the margin, which is the amount by which the sale price of the vehicle exceeds its purchase price.

The official said that when the margin is negative, then no GST is due. The decision of the Council to levy a uniform 18% GST rate on the sale of all used vehicles, including the electric ones, was to ease out the system. According to Sandeep Sehgal, a partner at AKM Global, those businesses that haven’t claimed depreciation under the tax laws will pay taxes on the difference between the sale price and the purchase price.

The 18% tax replaces the previous system, which had two rates: 12% for small cars and 18% for larger vehicles based on engine capacity and size.

For inventory type of vehicles, such as the ones sold by used EV dealers, GST would apply on the margin-where the sale price less purchase price, if ITC has not been claimed, said Priyal Shah, Partner at NPV & Associates LLP. If ITC has been claimed, then GST would be payable on the entire sale amount, as per normal GST rules.

Shah further clarified that depreciation benefits of Section 32 of Income Tax Act are only used for business purposes as a capital asset by registered business.

In case of second-hand EV dealers, when vehicles are considered as inventory, the margin scheme under Rule 32(5) of the CGST Rules, 2017, is applicable only if ITC has not been availed. Then, GST is charged on the margin, if positive. In case ITC has been availed, GST is charged on the entire sale consideration for ensuring compliance.