Last Saturday, in the GST Council meeting, a decision was taken for which Finance Minister Nirmala Sitharaman was made fun of on social media in the last 3-4 days. The example she gave while announcing this decision became a big problem for her. Nirmala Sitharaman said that now 18 percent GST will have to be paid on the profit made from the sale of old cars.

She gave an example and said that suppose you bought a car for 12 lakhs and sold it for Rs 9 lakhs, then 18 percent GST will be levied on 3 lakhs. This is where things got worse. In the absence of clarification, when people started doing calculations, they found out that they had to pay tax on the loss. That is, the car worth 12 lakhs which they are already selling at a loss of Rs 3 lakhs, they will have to pay 18 percent GST on that too. So their total loss is 3 lakhs + 18% GST, that is, the total loss is Rs 3.54 lakhs. But is this right?

What is the real thing?

First of all, this change is not going to affect any common man. That means if you are selling your old car to a friend, then this rule will not affect you. You will not have to pay any GST on the amount received from the sale of the car. This will only affect registered people. That means registered car sellers or businessmen. Whose work is to buy and sell old cars.

Tax will have to be paid on the margin

If a car is worth Rs 10 lakh. If it is sold for Rs 5 lakh after 2 years, then 18 percent GST will have to be paid on Rs 5 lakh. But this calculation is not so simple. In the middle of this calculation will come the Depreciated Value, that is, the value of the car that is left after its use. Suppose a car worth Rs 10 lakh has depreciated its value by Rs 3 lakh in 2 years. That means its depreciated value becomes Rs 7 lakh. If you are selling that car for Rs 5 lakh, then your margin has already become negative i.e. -2 lakh rupees. You do not have to pay any GST on a negative margin. But if the value of that car has depreciated to Rs 3 lakh and you sold it for Rs 5 lakh, then you will be considered to have made a profit of Rs 2 lakh and you will have to pay GST on it. The registered person will have to inform the tax authority about this depreciation value. Based on this value, it will be decided whether GST will be applicable on the margin of sale of the used car or not.

How to calculate depreciation value
The value of an object, machine, or property decreases due to use, time, or being old. To understand it in simple words, when we buy a property, the value that decreases with time is called depreciation. It is calculated in three ways. Straight line method, reducing balance method, units of production method, and sum of the year digit method. We calculate the depreciated value of an item through one of these methods. We are using the straight-line method here.

Annual depreciation = Price of the car – its salvage value (4-6% of the ex-showroom price)/useful life of the car

Price of the car – Rs 10 lakh

Salvage value – Rs 60,000

Useful life – 10 years

If you put these in the formula, you will get a value of Rs 94000. This means that the value of your car is decreasing by Rs 94000 every year. Now in this way, you can see what will be the depreciated value of your car after driving it for so many years. From that depreciated value, you will be able to find out whether you will have to pay GST on the margin or not.

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