Do you need to pay 18% GST on 'loss margin' of EV resale? Explained

GST on resale of used vehicles by businesses has been raised to 18% from 12%, bringing the used EV market at par with other petrol and diesel vehicles

The Goods and Services Tax (GST) Council’s recent decision to impose an 18 per cent tax on the resale of used electric vehicles (EVs) has sparked significant confusion. Finance Minister Nirmala Sitharaman's explanation, which referred to a tax on the "margin value" of resales, mistakenly suggested that individuals selling their used cars would be liable for the tax.

 

However, the tax will actually apply to businesses involved in the resale of used vehicles, not private sellers.

 

  Here's an overview of the GST Council's recommendation and the tax businesses will need to pay when selling used cars. 

Misunderstanding over GST hike

During the 55th GST Council meeting press conference on Saturday, the panel approved an 18 per cent GST on used EVs sold by businesses, replacing the previous 12 per cent rate.

 

While clarifying that the tax would not be on the entire resale amount and only the margin value, Sitharaman said, "When the discussions happened, it was on that margin value... the margin value between purchased product price and resale price, on the margin only this 18 per cent is put."

 

Using an example, she emphasised that if a car was bought for Rs 12 lakh and resold as used car for Rs 9 lakh, the price difference would be taxed.

 

This sparked confusion as it appeared that people would be taxed on reselling a car despite the resale representing a loss.

 

Simplifying GST on used EVs

The Council agreed to raise the GST on used EVs to 18 per cent when sold by businesses. However, this tax is applicable solely to the margin value.

 

For example, if a used car dealer purchases an EV for Rs 9 lakh and resells it for Rs 10 lakh, the tax will apply only to the Rs 1 lakh profit margin. Direct transactions between individuals remain exempt.

 

This aligns the tax structure for used EVs with that of petrol and diesel vehicles with larger engine capacities, which are already taxed at 18 per cent.

 

To sum up, this means: 

 

No GST for individuals: If you buy a car for Rs 12 lakh and sell it to another individual for Rs 9 lakh, no GST applies.

 

GST for businesses: If a dealer buys a car for Rs 9 lakh and sells it for Rs 10 lakh, the 18 per cent GST applies only to the Rs 1 lakh margin.

 

This clarification came alongside the Council’s official release, which detailed that the decision was aimed at standardising the tax treatment for all vehicles, including used petrol, diesel, and electric vehicles.

 

Implications of the tax on used EVs

The decision has sparked concerns in the second-hand EV market, which may become less attractive to buyers due to higher dealer margins being taxed.

 

While new EVs continue to enjoy a 5 per cent GST rate to encourage adoption, the shift in taxation for resold EVs could create additional challenges in promoting EV usage.

 

GST exemptions

The council also decided that aviation turbine fuel (ATF) will remain outside the "one-nation-one-tax" regime, retaining its taxation under the existing system.

 

The Council also recommended exempting GST on contributions made by general insurance companies to the Motor Vehicle Accident Fund. This fund, created under the Motor Vehicles Act, 1988, provides compensation and cashless treatment to victims of road accidents, including hit-and-run cases.