The sale of second-hand cars on the vendor platforms will attract goods and services tax (GST) only on the margins made by the dealer, revenue secretary Hasmukh Adhia clarified on Tuesday, removing apprehensions that the tax will apply on the entire sale value. The revenue secretary also said sale of second-hand cars between individuals or by individual to a firm won’t be treated as taxable transaction under GST. The tax will apply only on cars sold by registered vendors. The GST rates for second-hand car transactions will be the same as the new cars of the same make — 29% for small cars or 43% for all the other cars. Currently, used cars attract VAT at 0.5-14% in across various states and the levy is on the resale value. Tax experts said in states where the VAT on rates on used cars is higher than 5-6%, the tax incidence will be lower under GST and in other states there could be marginal increase.
GST on the sale price of used cards would have amounted to double taxation (as excise duty and VAT are already paid on them) and jacked up the prices of used cars. Currently, if the resale price is Rs 3.5 lakh for a used small car, the tax will be Rs 7,000 in a state that levies 2% VAT. However, under GST, the tax will be Rs 9,000 assuming a dealer margin of 10%.
Tax experts said that until Adhia clarified, it was not clear whether an individual selling the car to a designated dealer would attract tax under reverse charge mechanism (RCM). According to the GST Act, a registered dealer purchasing from an unregistered dealer is liable for tax under RCM, which means that the registered dealer would deduct the taxes from the payment to be made to the supplier.
In India, the size of the used-car market is almost 1.2 times the size of the new-car market. For example, Maruti True Value, which is the used-car selling arm of the company, is the second largest car seller in the company in terms of volumes, which is a testament to the growth of the used-car market experienced over the last decade. In the last five years the second-hand car market has grown by 10% CAGR. Most of the leading carmakers like Mahindra and Mahindra, Hyundai, Ford and Renault have set up a separate business for selling used cars.