Confused as how GST hike on used car will work? Here's how a higher GST of 18% will impact individuals and businesses
The GST council has recommended an increased 18% GST rate on the margin value of used car sales for specified petrol vehicles with 1200 cc or more, diesel vehicles with 1500 cc or more, and all EVs. The GST council also did not specify any new reverse charge liability or liability to tax on vehicles sold by unregistered sellers to registered or unregistered persons.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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However, this is not a new GST rule as 12% GST used to be charged earlier on such transactions. In any case most businesses cannot claim input tax credit on purchase of a car even if it's bought in the name of the GST registered business. The only exception to this claim of input tax credit (ITC) rule is car showroom dealers and other specified persons like transporters, etc who can claim ITC on car purchases.
Read below to find out who exactly will get impacted due to this recommendation of increased GST amount on sale of used cars.
How will GST be levied on the sale of used cars and who has to pay it?
According to Pankaj Jain, Tax Partner, EY India, GST would be leviable on the value as computed under the following equation @ 18% (irrespective of size/ type of car):"The sale price - Purchase value (after reducing depreciation as per the Income Tax Act).
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In case the value is negative, then no GST would be payable. The above is subject to the condition that the registered person selling the car is not claiming any Input Tax credit on purchase of the car."
How GST hike on used car will impact businesses taking benefit of depreciation
There is also a good chance that a business might be claiming depreciation on the purchase of the car. According to the Income Tax Act, 1961 depreciation can be claimed following the written down value (WDV) method. Under this method, each year you deduct a specified percentage of the car's value and take the price down. Like in 2023 if a car is valued at Rs 10 lakh, then in 2024 its value should be Rs 9 lakh if the rate of depreciation is 10%. Calculation= 10 lakh- 10% of 10 lakh= 9 lakh."In case depreciation is claimed then GST to be charged on sale value- depreciated value. In case depreciation is not claimed, then GST is to be charged on sale value- purchase value. Needless to say, if the margin is nil then no GST is applicable. The supplier has to charge GST and has to be borne by the consumer ultimately," says Shivam Mehta, Executive Partner, Lakshmikumaran and Sridharan Attorneys.
What did GST council recommend with respect to used car transactions
"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.[Note: GST is applicable only on the Value that represents Margin of the Supplier, that is, the difference between the Purchase price and Selling price (depreciated value if depreciation is claimed) and not on the value of the vehicle. Also, it is not applicable in case of unregistered persons."Impact of increase in GST rate for used car sales
ET Wealth Online has asked various experts about what might be the impact of 18% GST on used car sales. Here's what they said:Small cars of engine capacity below 1200cc and length less than 4000mm will remain cheaper
Advocate Apoorv Phillips, senior associate, Sirmacs Consulting (law firm), says, "old and used petrol vehicles of engine capacity of less than 1200 cc and of length less than 4000 mm can still be purchased by paying 12% GST. For example, Renault Kwid which has an engine capacity of 800 to 999 cc and length of 3,731 mm. So, a 2nd hand model of this car can be purchased at 12% GST rate if purchasing from a GST registered seller."Business who claim input tax credit on car need to pay GST on the sale price not margin
Chartered Accountant Bimal Jain, founder, A2Z Taxcorp LLP, says those businesses who are eligible for claiming input tax credit on car purchases (car showrooms, transporters, etc) need to pay GST on the sale value of the car and not the margin. "It is only those who can't claim ITC on car purchases, they need to pay GST on the margin. The key point to determine applicability of GST is whether the seller is GST registered or not."For example, a business who claims input tax credit, sells a car for Rs 10 lakh but it costed him Rs 8 lakh. So in this case GST will be levied on Rs 10 lakh and not Rs 2 lakh. If the said business was not claiming input tax credit then GST would have been levied on the margin i.e. Rs 2 lakh.
" If an unregistered seller sells an old and used car to registered buyer, no GST will be charged," says Phillips.
End consumers of used cars need to pay 6% more GST
Jain says ultimately the end consumers pay the GST amount on used car purchases if they are buying from GST registered dealers. The only difference in the amount of GST would be if it's charged on the margin or sale value. "If input tax credit is claimed then GST is charged on the sale value, otherwise if not claimed then GST is paid on the margin." The earlier GST rate was 12% and now it is proposed to be increased to 18%.Some possible scenarios
According to Chartered Accountant Siddharth Surana, here are some possible scenarios:1. A used car dealership is buying a car from a consumer at Rs 5 lakh and then making some value additions of Rs 1 lakh and then selling the car at Rs 7 lakh. This dealership is claiming no depreciation.
Ans: According to the CGST Rules, only the purchase price can be deducted from the sale value of the car for the purpose of computation of the margin of the supplier. In this case, the amount spent on value additions will not be deductible. Therefore, the car dealership will need to levy 18% GST on Rs 2 lakh i.e. Rs 36,000. The Rs 2 lakh is calculated as the difference between the sale price of car (Rs 7 lakh) and purchase price of car (Rs 5 lakh).
2. A used car dealership is buying a 2nd hand car for Rs 12 lakh and then claiming depreciation of Rs 2 lakh and then selling the car for Rs 9 lakh.
Ans: In this case, the depreciated value of the asset is Rs 10 lakhs (Rs 12 lakh being the purchase price as reduced by depreciation of Rs 2 lakh) and this depreciated value is higher than the sale value of the car. Thus, as there is a negative margin, no GST will be applicable.
3. A used car dealership is buying a 2nd hand car for Rs 12 lakh and then claiming depreciation of Rs 2 lakh and then selling the car for Rs 11 lakh.
Ans: In this case the depreciated value of the asset is Rs 10 lakh (Rs 12 lakh being purchase price as reduced by depreciation of Rs 2 lakh). The sale value of a used car is Rs 11 lakh. The margin of this supplier is positive as the sales value is higher than depreciated value. Thus, GST will be applicable at 18% on Rs 1 lakh i.e. Rs 18,000.
"GST applies on the profit margin, with the rate depending on the car type. For example, if a business purchases a car at Rs 10 lakh and sells it at Rs 12 lakh to an registered buyer, 18% GST will only apply to the margin amount, i.e., Rs 2 lakh," says Abhishek Soni, co-founder, Tax2Win.
Who can claim input tax credit on car purchase
Soni from Tax2Win says, "Input Tax Credit (ITC) is available if the seating capacity of motor vehicles used for transport of persons exceeds 13. It can be allowed for lower seating capacity for the categories mentioned below, Here are the cases under which ITC is available on motor vehicles -Persons involved in the business of supplying cars or other vehicles.People providing transportation of passengers can claim ITC on the vehicle purchased.Driving schools or persons engaged in imparting training on driving the vehicle are eligible to claim ITC." #sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
This story originally appeared on: India Times - Author:Faqs of Insurances
