CA Imran Wasta Explains GST on Second-Hand Cars

In a recent statement, Finance Minister Nirmala Sitharaman said that all used cars would be subject to the GST. She uses the example of someone purchasing a car for ₹12 lakh and then selling it for ₹9 lahk to illustrate the dilemma. In this case, the owner would be required to pay ₹3 lakh, or 18% GST.

Concern was raised by the statement since the owner would lose ₹3 lakh while still having to pay taxes on that sum. Naturally, a lot of people started to wonder whether these levies were necessary. But the finance minister was talking about the GST Margin Scheme, which is applicable to used goods like cars. To better understand this, let's examine it with the help of CA Imran Wasta.

What is the Margin Scheme?

The Margin Scheme essentially means that GST is levied only on the profit amount or margin on the sale of the car and not on the full sale consideration. Where a dealer purchases a vehicle for ₹5 lakh, he sells it for ₹6 lakh. The GST has to be computed only on the amount of ₹1 lakh profits. At an 18% rate, the tax liability would be ₹18,000.

However, if the dealer bought a car for ₹12 lakh and sold it for ₹9 lakh, then a loss of ₹3 lakh is incurred. Since in this case, there would be no profit or margin, no GST is applied.

Important Points to Keep in Mind:

• Applicable to Dealers Only: The Margin Scheme applies only to dealers and does not include private sellers.
• GST on the Profit Margin: When acquiring from a dealer, GST would be imposed only on a dealer's profit margin instead of the full sale value.
• Enhanced GST Rate: The GST rate imposed on second-hand cars enhanced from 12% to 18% but remains only for the profit margin that is for dealers.

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In short, GST on second-hand cars is charged only on the profit of the dealer. In case there is no profit, i.e., it is a loss, there is no GST. Thus, this scheme ensures that only the value added by the dealer is taxed.