Levy of GST on Old and Used Refurbished Cars

The introduction of GST has transformed the way automobiles, including cars, are taxed. This article delves into the GST applicability and tax rates regarding the sale of old and refurbished cars.

GST Applicability on Old Car Sales

In the GST regime, a 'supply' constitutes a taxable action. The term 'supply' encompasses varied transactions such as sales, exchanges, transfers, barter, leasing, rentals, licensing, and disposals intended for business purposes and include consideration. For a transaction to qualify as a sale, consideration and the promotion of business activity must both be evident.

Tax Rates and HSN Code

GST rates on cars range from Nil to 28% based on their type and usage. Under GST, no difference is made between new and previously owned items. Thus, GST rates applicable to new cars also apply to used cars. However, according to Notification No. 8/2018-Central Tax (Rate), GST rates on old cars have been reduced as follows:

• LPG/CNG vehicles with engine capacity ≤1200cc & length ≤4000mm: 18% GST + 1% compensation cess
• Diesel vehicles with engine capacity ≤1500cc & length ≤4000mm: 18% GST + 3% compensation cess
• Engine capacity >1500cc:
  • If no Input Tax Credit (ITC) claimed: 18% GST + 20% compensation cess
  • If ITC claimed: 28% GST + 20% compensation cess
• SUVs (Engine capacity >1500cc):
  • If no ITC claimed: 18% GST + 22% compensation cess
  • If ITC claimed: 28% GST + 22% compensation cess
• Electric vehicles (two/three-wheeled): 5% GST, no compensation cess

It's crucial to note that compensation cess doesn't apply if the seller hasn't claimed ITC on the sale of old/used vehicles.

Supply Valuation and ITC Claims

For dealers involved in the trade of old cars, a margin scheme is available where GST is levied only on the profit margin (difference between sale and purchase prices) of second-hand vehicles. If this difference is negative, it is not considered.

If depreciation is claimed under section 32 of the Income Tax Act, the supply value is determined by the discrepancy between the received sum and the vehicle's depreciated value as of the supply date.

If any value is added via repairs or refurbishment, such enhancements are included in the overall valuation.

Regarding Input Tax Credit (ITC) claims, if a business purchases a used car from another registered dealer and GST is collected and paid by the selling dealer, the buyer may claim the GST paid as ITC per regular ITC regulations.

However, section 17(5) stipulates ITC isn't claimable for certain vehicles, specifically those used for person transport with a maximum seating of 13, driver included. ITC is eligible if vehicles are used for business, such as company-provided cars, demonstration vehicles as capital assets, or rented cars for corporate purposes. Transport companies can claim ITC for vehicles used in passenger transport.

In summary, GST's implementation has introduced changes to the tax processes governing old and refurbished cars. Awareness of GST applicability and respective tax rates is vital for both sellers and buyers.