Recently, when the GST Council met, the GST on the sale of second hand cars was increased from 12% to 18%. This is a direct increase of 50 percent in tax on used cars. Many confusions arose regarding this increase, and many calculations also came to light. But what does this mean for a customer? How much has this increase in tax increased his car buying budget? What is the correct calculation of the impact on his pocket? Let us answer all your questions here…
First of all you should clear one of your confusions. When Finance Minister Nirmala Sitharaman said that you bought a car worth Rs 12 lakh and sold it for Rs 9 lakh, then 18 percent GST will be levied on the margin. Actually, this is the basic principle of taxation that loss is not taxed, but only profit is taxed. Therefore, what Nirmala Sitharaman meant was that if you bought a car worth Rs 12 lakh, sold it for Rs 9 lakh and when it was sold back for Rs 10 lakh, then 18 percent GST would be levied on the profit margin of Rs 1 lakh only. But how will this affect your pocket budget?
As a customer, when you go to buy a second hand car, what will be the impact on your pocket? This is the biggest question. According to the news of ET, this GST hike of the government will mainly affect second hand car dealers like Cars 24, Maruti True Value, Mahindra First Choice and Spinny. If you sell your old car to these dealers and they refurbish them and sell the car to someone else, then the profit margin will be taxable. That means you will get the full value of your old car and you will not have to pay any tax on selling it.
Now, if any value addition has been done by the companies to the new customers who will buy second hand car from them, then you will have to pay tax on that value. These companies say that the increased cost due to GST will increase only by 1% of the total budget of the customers for purchasing the car or the overall value of the car. Let us also understand this with an example…
Suppose you sell your old Maruti Dzire to the country's largest second hand car dealer company 'Maruti True Value' for just Rs 4 lakh. Then you will get full money for it. Now Maruti True Value refurbishes the same car by investing Rs 10,000 and then sells the car for Rs 4.50 lakh. In this way, GST at the rate of 18% on this price of second hand car will be only Rs 9000.
If this old GST slab was applied at 12%, it would have been Rs 6000. In such a situation, the total tax liability on second hand car has increased by only Rs 3,000. In this way, the overall value of this Maruti Dzire car is less than 1 percent of Rs 4.50 lakh. There is also a catch in this that second hand car dealers should collect only a part of this tax from you and not the entire value, generally second hand car dealers keep a margin of only 6 to 8 percent on the resale of small cars.
