A perspective on applicability of GST on used vehicles

Prabhat Nigam

30 Mar, 2022

The advent of Goods and Services Tax (GST) has proven to be a godsend for the automobile sector. The impact of the applicability of GST on used vehicles has been encouraging because the applicable taxes on the automobile sector have reduced significantly compared to previous VAT and the compensation cess has also been reduced to nil.

When GST was introduced initially, the applicable GST rates were same for both the new and used vehicles. However, the government later provided a reduction of 35 percent on the applicable GST rate on used vehicles. Later, in the year of 2018 depending on the seating capacity of the vehicle, the GST rates were further, reduced to 18% and 12%. On top of that, the compensation cess was completely exempted. This was seen altogether as a positive effect of GST on used vehicles.

This piece of writing discusses the impact of GST on used vehicles, the applicable rules and the methods of calculation of the taxable value.

Timeline on the applicability of GST on used vehicles over a period of time

The below mentioned notification and rules cover the applicable rates of GST on used vehicles-

1. Applicability of GST rate from 13^th Oct 2017 to 24^th Jan 2018- The Notification No. 37/ 2017 – Central Tax (Rate) dated 13^th of October 2017
2. Applicability of GST rate from 25^th Jan 2018- The Notification No. 08/ 2018 – Central Tax (Rate) dated 25^th January
3. Cess exemption on used vehicles- via Notification No. 01/ 2018
4. Application of Rule 32(5) of CGST Rules, 2017 on the valuation of second hand goods

Applicability of GST rate from 13^th Oct 2017 to 24^th Jan 2018

When the GST came into force initially, the applicable GST rates were same for both the old/ used vehicles and that of the new vehicles i.e. 28% plus applicable cess. Such high rate of taxes posed a huge concern for those persons who were involved in the business of leasing of old vehicles.

The Notification No. 37/ 2017 – Central Tax (Rate) dated 13^th of October 2017 came as a big relief for all those involved in the business of used and old vehicles. This notification provided a much needed relief for those businesses who are indulged in the business of leasing of motor vehicles. This means that the assessee needs to discharge GST only on 65% of the applicable GST rate on such motor vehicles. The abatement was allowed till 24^th January 2018 and was also subject to the following conditions:

1. The lessor should have purchased the motor vehicle before 1^st of July, 2017 and supplied before 1^st of July 2017.
2. The supplier of motor vehicles should be a registered person and should have purchased the motor vehicle before 1^st July 2017 and hasn’t availed Input tax Credit (ITC) of Central Excise Duty, Value Added Tax (VAT^[1]) or any other taxes paid on such vehicles.

It must be noted that the first condition is applicable on the only to those persons who are engaged in the business of leasing motor vehicles and the second application is applicable to the all the registered persons.

Applicability of GST rate from 25^th Jan 2018

The Notification No. 08/ 2018 – Central Tax (Rate) dated 25^th January  brought a major relief to the suppliers of used motor vehicles which lead to making such used vehicles more affordable.

The reduced rates provided by the notification shall be used for calculating the value on which GST shall be levied. According to the notification, the value of supply shall be the ‘Margin of Supply’ on which the GST shall be calculated. The value on which the reduced rates of taxes shall be calculated in the following manner:

• In case where depreciation has been claimed under section 32 of the Income Tax Act, 1961-

In this case, the margin of supply shall be calculated as the difference between the sale consideration received on the sale of vehicle and the depreciated value of such vehicle on the date of supply. In cases where such marginal value has been found to be negative, then it shall be ignored and no GST will be levied.

• In all cases other than mentioned in a.-

In all other cases except the one mentioned in situation a., the margin of supply shall be considered as the difference between the selling price and the purchase price and tax is calculated on such margin. Where the marginal value is found to be negative, then GST will not be applied on such cases.

It must be noted that this notification is not applicable where the supplier has goods already availed ITC under the previous indirect tax regime. 

Cess exemption on used vehicles

The GST on used vehicles has considerably gone down from the earlier 28% giving a breather to the industry. However, the greatest benefit to the used vehicle market came from the reduction in the compensation cess. The compensation cess has been made nil since 25^th January 2018 for used cars via Notification No. 01/ 2018. It must be noted that such exemption will be available only if the benefits arising from the ITC/ CenVAT credit have not been availed.      

Application of Rule 32(5) of CGST Rules, 2017 on the valuation of second hand goods

Rule 32(5) of the CGST Rules, 2017 talks about the taxable supplies provided by a person who deals in buying and selling second hand goods. The rule states that if the dealers of the second hand goods supply the used goods after minor processing without altering the nature of the goods and also where they have not availed the benefit by availing ITC on such purchase of goods, then GST will be applicable only on the differential amount between the purchase price and the selling price. In case where this differential value is negative, it will be ignored.   

Read our Article:Problems in availing of ITC under GST