GST on Second Hand Goods - Special Emphasis on Used Cars

Goods and Services Tax (GST) is applicable to a wide range of goods and services in India, including second-hand or used goods. The taxation of second-hand goods, especially used cars, has undergone several changes since the introduction of GST. The government has provided special provisions under the Margin Scheme to avoid double taxation and facilitate the used car market.

Valuation of Second hand goods

Under GST, second-hand goods are taxable unless specifically exempted. However, to ease the burden on the resale industry, the government introduced Rule 32(5) of the CGST Rules, 2017, which provides relief through the Margin Scheme. This scheme allows dealers to pay GST only on the margin of profit instead of the full transaction value.

As per Rule 32 (5) of CGST Rules provides where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods, the value of supply shall be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored.

The proviso to the above rule further provides that in case of the purchase value of goods repossessed from an unregistered defaulting borrower, for the purpose of recovery of a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by 5 percentage points for every quarter or part thereof, between the date of purchase and the date of disposal by the person making such repossession.

Margin Scheme – Taxing Used Cars

GST on second-hand goods, especially used cars, has been designed to minimize tax burdens through the Margin Scheme. While it benefits dealers and customers by reducing tax liability, challenges related to valuation and awareness still persist. A clear understanding of GST provisions ensures compliance and cost efficiency in the used car market, promoting a structured and transparent resale industry.

Notification No. 08/2018-CT (Rate), dated 25.1.2018 is an exemption Notification issued under section 11(1) of the CGST Act, which provides for exemption from payment of Central tax in excess of 9% or 6%, as the case may be for old and used motor vehicles.

It also provides how to determine the taxable value of the outward supply, which shall be the actual margin from the difference between the selling price and purchase price.

Notification no. 08/2018 (central tax rate) provides as under:

• in case of a registered person who has Claimed depreciation under section 32 of the Income-tax Act, 1961 on any motor vehicle, the value that represents the margin of the supplier shall be the difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply, and where the margin of such supply is negative, it shall be ignored; and

• In any other case, the value that represents the margin of supplier shall be, the difference between the selling price and the purchase price and where such margin is negative, it shall be ignored.

There is a restriction in Para 2 of the Notification No. 08/2018-CT (Rate) dated 25.01.2018 that this Notification shall not apply, if the supplier of such goods has availed input tax credit as defined in clause (63) of section 2 of the CGST Act or CENVAT defined as per CENVAT credit Rules, 2004 or input tax credit of VAT or any other taxes paid on such goods.

Accordingly, under the Margin Scheme, GST is levied only on the profit margin earned by the dealer rather than the full sale price. The conditions for availing of this scheme include:

• The input tax credit (ITC) should not have been claimed by the supplier when purchasing the used goods.

• If the sale price is lower than the purchase price, no GST is levied.

• GST is applied only on the profit margin (Sale Price - Purchase Price).

GST Calculation Example

Suppose a dealer buys a used car for ?5,00,000 and sells it for ?5,50,000. The profit margin is ?50,000. If the applicable GST rate is 12%, the tax liability is calculated as:

GST = 50,000 × 12% = ?6,000

Without the Margin Scheme, GST would have been levied on ?5,50,000, significantly increasing the cost.

Impact of GST on Used Car Dealers

Reduction in tax liability: Due to the Margin Scheme, dealers pay GST only on profit rather than the full price.

Competitive pricing: Lower GST rates allow for competitive resale prices.

Simplified compliance: The structured taxation mechanism eases compliance for used car dealerships.

Rate of tax on second hand vehicle—

Notification No. 08/2018-CT (Rate), dated 25.1.2018 is an exemption Notification issued under section 11(1) of the CGST Act, which provides for exemption from payment of Central tax in excess of 9% or 6%, as the case may be for old and used motor vehicles.

It also provides how to determine the taxable value of the outward supply, which shall be the actual margin from the difference between the selling price and purchase price.

There is a restriction in Para 2 of the Notification No. 08/2018-CT (Rate) dated 25.01.2018 that this Notification shall not apply, if the supplier of such goods has availed input tax credit as defined in clause (63) of section 2 of the CGST Act or CENVAT defined as per CENVAT credit Rules, 2004 or input tax credit of VAT or any other taxes paid on such goods.

Recently, GST council in its 55th Meeting of the GST Council recommended to increase the GST rate from 12% to 18 % on sale of all Old and used vehicles, including EVs other than those specified at 18% -Sale of Old and used petrol vehicles of engine capacity of 1200 cc or more & of length of 4000 mm or more; diesel vehicles of engine capacity of 1500 cc or more & of length of 4000 mm and SUVs.

The increased rate of tax has been notified through Notification No.04/2025-Central Tax (Rate)] Dated: 16th January, 2025.

The GST rate used cars sales have now been unified to a single rate of 18%. This new rate applies to all used vehicles, whether petrol, diesel, or electric cars (EVs).

Relevant judicial pronouncement—

• Applicability of notification No. 8/2018 -Central Tax (Rate) dated 25th January, 2018 is optional. If the appellant wishes to avail input tax credit on the components used in the refurbishment of the old and used car, they can very well avail the same without availing benefits of the said notification. However, if the benefit of the notification No. 8/2018 -Central Tax (Rate) dated 25th January, 2018 is to be availed, then the conditions for the same have to be followed. [2021] 43 TAXLOK.COM 156 (AAAR-Rajasthan)

• The applicant would be eligible to claim input tax credit of tax paid on both direct and indirect expenses such as repairs and refurbishment works of used vehicle, spare purchases, office stationary, telephone, rent, advertisement, professional charges, etc, utilized in second hand business of luxury cars, subject to the conditions prescribed under section 16 to section 21 of the CGST Act and rules 36 to 45 of CGST Rules. [2024] 69 TAXLOK.COM 340 (AAR-Kerala)

• By filing this petition under Article 226 of the Constitution, the petitioner has prayed to declare proviso to Rule 32(5) of CGST Rules to be arbitrary and discriminatory as it distinguishes between a registered borrower and unregistered borrower. [2022] 53 TAXLOK.COM 044 (Gujarat)

• Since the applicant has been availing the benefit of paying GST at a concessional rate on supply of second hand vehicle, they shall not avail Input Tax Credit. [2021] 41 TAXLOK.COM 052 (AAR-Maharashtra)

• Liability will be discharged by the applicant on the difference between selling price and purchase price as stipulated in Rule 32(5) of CGST Rules, 2017 only in respect of old cars. [2019] 08 TAXLOK.COM 105 (AAR-Maharashtra)