The GST framework for old and refurbished cars has been streamlined, bringing more clarity and ease for both dealers and buyers. Following the 55th GST Council meeting, a uniform 18% GST rate was introduced on second-hand vehicles. Under this system, tax is levied on the profit margin rather than the total transaction value. This change eliminates earlier misconceptions such as “tax on losses” and promotes a fairer structure in the used car sector.
GST Rate on Used Cars:
The 55th GST Council fixed GST at 18% on used vehicles, ensuring taxation applies only on the margin of profit, not the full sale price.
For both business owners and buyers, understanding the applicable GST rate, relevant HSN codes, and compliance requirements is crucial to operate within this updated structure.
GST on Used Cars – Key Understanding
The levy of GST on used cars arises from the concept of supply. The definition of supply under GST includes sale, exchange, transfer, barter, lease, rental, license, and disposal carried out in the course or furtherance of business for a consideration. Therefore, two main conditions define supply:
- Presence of consideration
- Furtherance of business
If either of these elements is absent, the transaction does not qualify as a taxable supply.
In the case of resale or trade of old/used cars, GST applies. However, if the transaction occurs privately between two individuals (not as part of business activity), such resale is exempt from GST and remains outside the tax net.
Applicability of GST on the Sale of Old Cars
The applicability of GST on old or used cars depends on the nature of the seller, the registration status of both parties, and the transaction type. The table below outlines the scenarios:
GST Impact on Different Used Car Sale Situations
| Type of Seller | Is the Seller Registered? | Is the Buyer Registered? | Applicability of GST |
| Business | No | No | Not applicable |
| Business | No | Yes | Not applicable (excluded from the reverse charge list under Section 9(4) of the CGST Act) |
| Business | Yes | No | GST applicable |
| Individual (personal use) | No | No | Not applicable |
| Car Dealer | Yes | No | GST applicable |
| Auction by Registered Dealer | Yes | Yes | GST applicable |
| Auction by Unregistered Seller | No | NA | Not applicable |
| Sale to Exporter | NA | NA | Not applicable, provided the car is exported |
GST Rates and HSN Codes for Used Cars
Under GST, the tax rate on vehicles may range from nil to 28% depending on the type and use. Initially, no distinction existed between new and old cars, meaning both were taxed at the same rate. However, Notification No. 8/2018 – Central Tax (Rate) revised the GST rates on used cars, making them more favorable.
Revised GST Rates for Used Cars
| Description | HSN Code | GST | Compensation Cess |
| LPG/CNG vehicles with engine capacity ≤1200cc and length ≤4000mm | 8703 | 18% | 1% |
| Diesel vehicles with engine capacity ≤1500cc and length ≤4000mm | 8703 | 18% | 3% |
| Vehicles with engine capacity >1500cc | 8703 | 18% (if ITC not claimed) / 28% (if ITC claimed) | 20% |
| SUVs (engine capacity >1500cc) | 8703 | 18% (if ITC not claimed) / 28% (if ITC claimed) | 22% |
| Electric vehicles (2-wheelers & 3-wheelers) | 8703 | 5% | Nil |
Additionally, through Notification No. 1/2018 – Compensation Cess, the government exempted cess on the sale of old or used motor vehicles where the seller has not availed Input Tax Credit (ITC).
Key GST Rules
For taxpayers, understanding how the value of supply is determined for old or used cars is crucial. Dealers involved in buying and selling second-hand vehicles can use the margin scheme, where GST is levied only on the difference between the selling price and purchase price. If this margin is negative, it is disregarded.
In cases where a registered person has already claimed depreciation under Section 32 of the Income Tax Act, the taxable value will be the difference between the amount received on sale and the depreciated value of the car at the time of supply.
If any repairs or refurbishments have been carried out on the car, the cost of such improvements must be added to the value of goods and included in the margin.
Examples:
- If a dealer sells two cars, earning a profit of ₹25,000 on one and a loss of ₹10,000 on another, GST is payable only on ₹25,000. The loss is ignored.
- If a car is purchased for ₹50,000, repaired for ₹5,000, and later sold for ₹65,000, GST applies on ₹10,000 (65,000 – 55,000).
Recent Updates on Used Cars
From 16th January 2025, the GST rate on old and used cars, including electric vehicles (EVs), has been revised from 12% to 18%. This move creates uniformity in taxation for businesses and dealers handling second-hand vehicles. However, the increased rate may raise the overall cost of used cars sold by registered dealers, particularly affecting EV affordability.
It has also been clarified that GST does not apply to private sales between individuals, thereby clearly distinguishing personal transactions from business-related sales.
Input Tax Credit (ITC) on Used Cars
When a dealer buys a used car from another registered dealer, the selling dealer charges and pays GST. The purchasing dealer can then claim the GST paid as input tax credit under normal ITC rules.
That said, Section 17(5) restricts ITC for certain motor vehicles. ITC cannot be claimed on cars designed to carry 13 or fewer persons (including the driver), except in the following cases:
- Further supply of motor vehicles
- Passenger transport services
- Providing driver training services
Special Notes on ITC:
- Cars provided to employees: ITC is not allowed, even if used for business activities.
- Demo cars: Treated as capital assets and not for resale, so ITC can be claimed.
- Car rentals: ITC is allowed for vehicles with seating capacity above 13 persons, as per Section 17(5). Employers can claim ITC on GST charged by service providers in such cases.
- Transport businesses: When vehicles are purchased specifically for passenger transport, ITC can be claimed.
Negative Margins on Used Cars: Is GST Applicable?
GST on the sale of used cars is levied only when there is a positive margin. This means that the selling price must be higher than the purchase value (or depreciated value) of the vehicle. If the margin turns out to be negative, meaning the sale is at a loss, GST is not applicable. This rule specifically applies to registered dealers engaged in the resale of used vehicles.
Example:
If a dealer sells a used car for ₹15 lakh that was originally bought for ₹25 lakh, with depreciation claimed at ₹8 lakh, the margin becomes negative (₹15 lakh – ₹25 lakh + ₹8 lakh = –₹7 lakh). In such a case, GST is not charged on the transaction.
What is the value of supply on which GST is charged?
The taxable value is based on the margin between the sale and purchase price:
- If depreciation is claimed: The margin is the difference between the selling price and the depreciated value of the car on the date of sale. If this margin is negative, it is ignored.
- In all other cases: The margin is the difference between the sale price and purchase price. Negative margins are not considered.
FAQ’s
1. Is GST applicable if a used car is sold at a loss?
No, GST is not applicable on negative margins. Tax applies only when there is a profit margin on the sale.
2. How is GST calculated on used cars?
GST is calculated on the difference between the selling price and the purchase price (or depreciated value, if depreciation is claimed). The applicable GST rate is 18%.
3. Do individuals selling their personal cars need to pay GST?
No. Private sales between two individuals are outside the scope of GST. The tax applies only to business transactions by registered dealers or companies.
4. What happens if a dealer makes profit on one car and loss on another?
GST is payable only on the positive margin. Losses are ignored while calculating tax liability.
5. Are refurbishment or repair costs included in GST valuation for used cars?
Yes. If a car undergoes repairs or refurbishment before resale, those costs are added to the purchase price while determining the margin.
6. Is GST applicable on demo cars sold by dealers?
Yes. Demo cars are treated as capital assets. When sold, GST applies on the margin value after accounting for depreciation.
7. Are electric vehicles (EVs) sold second-hand taxed differently?
No. From January 2025, both regular used cars and EVs attract a uniform GST rate of 18%.
8. Is Input Tax Credit (ITC) available on used car purchases?
ITC can be claimed only in specific cases, such as when the vehicle is used for resale, passenger transportation, or driving training. Otherwise, ITC on cars with seating capacity of up to 13 persons is restricted under Section 17(5).
9. Who pays GST if the Government sells old cars?
- If sold to a registered buyer, the buyer must pay GST under reverse charge.
- If sold to an unregistered buyer, the Government department must obtain GST registration and pay the tax.
10. What is the GST rate on second-hand cars in India?
The GST rate on second-hand cars is 18%, applied only on the profit margin, not the full sale value.
