Implementation of GST has been a boon for the automobile industry. The impact of GST on used vehicles has been encouraging as the tax rates have reduced significantly compared to VAT, and compensation cess has also been reduced to nil.
At the time of introduction of GST, the same GST rate was levied on both new and used vehicles. In 2017, the government provided a reduction of 35% on the applicable tax rate. Later on, in 2018, the rates were reduced to 18%/12% (depending on vehicle capacity), and the compensation cess was also exempted. All this can be regarded as a positive effect of GST on used vehicles.
In this article, we have elaborated on the impact of GST on used vehicles in 2021, along with the rules and method of computing taxable value.
Impact of GST rates on used vehicles over a period of time
In this article, we shall discuss the below important notifications and rules which cover the GST rate application on used vehicles –
- Notification No. 37/2017 – Central Tax (Rate) dated 13th October 2017 – Applicability of GST Rate on Leasing of Old/Used vehicles
- Notification No. 08/2018 – Central Tax (Rate) dated 25th January 2018 - Applicability of GST rate on sale of old/used vehicles.
- Notification No. 01/02018 – Compensation Cess (Rate) dated 25th January 2018 – Exemption of cess on sale of old/used Motor vehicles.
- Rule 32(5) of CGST Rules, 2017 - Applicability of GST on sale of Used Goods (Including Person dealing in Sale & Purchase of Old / Used Motor Vehicles)
1. GST Rate applicable from 13th October 2017 to 24th January 2018
After the implementation of GST, the sale of old and used vehicles was taxed at the same rate as applicable on new vehicles, i.e. 28% + Applicable cess. This high rate of tax was a concern for all those in the business of leasing an old vehicle.
Notification No. 37/2017 – Central Tax (Rate) dated 13th October 2017 came as a big relief for all those in the business of used vehicles. It provided the much-awaited abatement of 35% to the lessor who is into the business of leasing motor vehicles.
In other words, the assessee needs to discharge GST only on 65% of the applicable GST rate on such motor vehicles. Such abatement was allowed till 24th January 2018 and was subject to the following conditions –
- The motor vehicle was purchased by lessor before 1st July 2017 and supplied before 1st July 2017.
- The supplier of the motor vehicle is a registered person. Such supplier had purchased the motor vehicle before 1st July 2017 and has not availed Input Tax Credit of Central excise duty, Value Added Tax or any other taxes paid on such vehicles.
Please note that condition(1) applies to only those engaged in the business of leasing motor vehicles, and condition(2) applies to all registered persons.
2. GST Rate applicable from 25th January 2018
The government provided a major relief to the suppliers of old and used motor vehicles through Notification No. 08/2018 – Central Tax (Rate) dated 25th January 2018.
This notification made old/used motor vehicles more affordable, and a comparison of the reduced GST rates from 25/01/2018 with the rates applicable till 25/01/2018 is as follows –
Value on which the reduced rates shall be applicable –
The above-stated notification also provides the mechanism to calculate the value on which GST shall be levied. As per the notification, the Value of Supply shall be the “Margin of Supply” on which GST shall be calculated in the manner described below –
a. If depreciation is claimed u/s 32 of Income Tax Act, 1961 –
In this case, the margin of supply shall be the difference between the sale consideration received on the sale of the vehicle and the depreciated value of such vehicle on the date of supply. In cases where such value is negative, it shall be ignored, and no GST will be levied.
b. In other cases –
The margin of supply shall be the difference between the selling price and the purchase price, and tax is to be calculated on such margin. Where such value is negative, it shall be ignored, and no GST will be levied.
Please note that this notification shall not apply if the supplier of goods has availed input tax credit under earlier law or GST.
3. Exemption of cess on used vehicles
Although the government had reduced the GST rates from 28 %, the greatest benefit to the industry came when there was a reduction in the compensation cess. The compensation cess has been made nil since 25th January 2018 for used cars via Notification No. 01/02018. However, this is applicable only if the benefits of the input tax credit/ Cenvat credit have not been availed.
4. Applicability of Rule 32(5) of CGST Rules, 2017 – Valuation of Second hand goods
Rule 32(5) deals with taxable supply provided by a person dealing in buying and selling second-hand goods. The rule states that if second-hand goods dealers supply used goods after minor processing, which does not alter the nature of the goods, and where no Input Tax Credit has been availed on the purchase of such goods, then GST will be applicable only on the differential amount between the selling price and the purchase price. Where the value of such supply is negative, it shall be ignored.
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Q. What is the value of supply to compute GST on used vehicles?
Ans. Under GST, the Value of Supply is the money that the seller collects from the buyer in exchange for goods. If the seller provides a discount on the sale of goods and shows the deal in the invoice, the discount will be excluded from the Value of Supply.
Q. What is the Impact of GST on used vehicles?
Ans. The overall tax liability has been reduced under GST as compared to VAT. In addition to reducing taxes, the government has also exempted cess on the sale of second hand vehicles. The reduced rates are as follows –
Q. Is GST payable on purchase of used vehicles from an unregistered person?
Ans – As per Notification No. 10/2017, when a second hand vehicles dealer purchases such a vehicle from an unregistered person, GST is not levied. Under such circumstances, GST is payable under reverse charge (the liability to pay tax is on the recipient of supply of goods instead of the supplier of such goods ). When such a vehicle is sold to consumers, then is GST payable on margin amount (Sale price – Purchase price).