Table of Contents
Introduction
Since the implementation of Goods and Services Tax (GST) in India, the treatment of second-hand goods, including used cars, has raised various interpretational and practical concerns. The government has made conscious efforts to ease the tax burden on the resale sector by introducing a mechanism that prevents double taxation—especially in cases where goods have already suffered tax at the time of initial sale.
This article sheds light on the specific provisions of GST applicable to second-hand goods, with a special emphasis on pre-owned cars, and explains how Rule 32(5) of the Central Goods and Services Tax Rules, 2017—commonly referred to as the Margin Scheme—comes into play. Dealers and buyers both must be aware of how GST is calculated, what exemptions apply, and how valuation is done, especially where Input Tax Credit (ITC) is not available.
By the end of this article, you’ll have a clear understanding of how GST works in the resale market, the benefits and limits of the Margin Scheme, and how to remain fully compliant while optimizing tax liability.
Valuation Method for Second Hand Goods: Application of Rule 32(5)
Under the GST regime, every supply of goods is deemed taxable unless specifically exempted under notifications issued under Section 11 of the CGST Act, 2017. However, when it comes to second-hand goods, especially those resold without availing Input Tax Credit, a special valuation mechanism has been prescribed under Rule 32(5) of the CGST Rules, 2017.
According to this rule, where a taxable supply is made by a person engaged in the business of buying and selling used goods (either as-is or after minor processing that does not change the nature of the goods), and no input tax credit has been claimed on the purchase of such goods, the value of supply shall be the margin, i.e., difference between the selling price and the purchase price.
Furthermore, if the resulting margin is negative, the rule clarifies that such negative value shall be ignored—providing significant relief in loss-making resale transactions.
Proviso for Repossessed Goods from Defaulting Borrowers
An important proviso to Rule 32(5) addresses the valuation of goods repossessed from unregistered defaulting borrowers. In such cases, where a financial institution or lender repossesses goods to recover outstanding dues, the deemed purchase price for the purpose of calculating GST shall be the original purchase price paid by the borrower, reduced by 5% for every quarter or part thereof from the date of purchase to the date of repossession.
This clause ensures a standard depreciation mechanism in cases where the lending institutions or financiers repossess and resell such goods, avoiding excessive GST liability on depreciated assets.
Profit Margin-Based Taxation under GST: A Relief Mechanism for Used Car Dealers
The Goods and Services Tax (GST) regime in India recognizes the need to minimize cascading tax effects in the resale of second-hand goods, particularly pre-owned vehicles. To achieve this, the law provides for a special valuation mechanism popularly known as the Margin Scheme, governed by Rule 32(5) of the CGST Rules, 2017. This rule ensures that GST is levied only on the value added by the reseller, i.e., the profit margin, rather than the entire transaction value.
To further support the automotive resale sector, the government issued Notification No. 08/2018-Central Tax (Rate) dated 25th January 2018, in exercise of the powers under Section 11(1) of the CGST Act, 2017, which allows a partial exemption of GST for the sale of old and used motor vehicles. It prescribes concessional tax rates—either 9% or 6% Central Tax, depending on the vehicle’s engine capacity and fuel type.
More importantly, this notification lays down how the taxable value is to be computed, especially in cases where the seller:
- Has claimed depreciation under Section 32 of the Income-tax Act, 1961 – In such cases, the margin shall be the difference between the sale consideration and the written down value (WDV) of the vehicle on the date of resale.
- Has not claimed depreciation – Here, the margin is the difference between the selling price and purchase price of the vehicle.
In both cases, where the margin is negative, it is to be ignored for GST calculation, thus relieving dealers from paying tax on loss transactions.
However, Para 2 of Notification No. 08/2018 imposes a critical restriction: the margin-based exemption shall not apply where the dealer has availed input tax credit (ITC) on the purchase of such motor vehicles. ITC here includes:
- Credit under clause (63) of Section 2 of the CGST Act,
- Credit under the CENVAT Credit Rules, 2004, and
- Credit of VAT or any other taxes previously paid on such goods.
This ensures that the Margin Scheme is strictly applied only in non-ITC cases, thereby avoiding dual benefits and maintaining the integrity of the input-output tax chain.
Illustration: How GST is Levied Under the Margin Scheme on Sale of Used Vehicles
To understand the financial advantage provided by the Margin Scheme, let’s consider the following practical scenario:
A used car dealer purchases a second-hand SUV for ₹6,80,000 and sells it for ₹7,35,000. The dealer does not avail input tax credit on the purchase, and the sale is eligible for the Margin Scheme.
Here’s how the GST is calculated:
- Purchase Price: ₹6,80,000
- Sale Price: ₹7,35,000
- Profit Margin: ₹7,35,000 – ₹6,80,000 = ₹55,000
- Applicable GST Rate (assuming mid-sized diesel SUV): 12%
Now, under the Margin Scheme, GST is only charged on the profit margin:
GST Payable = ₹55,000 × 12% = ₹6,600
However, if the Margin Scheme was not applicable, GST would have been calculated on the entire sale value of ₹7,35,000, resulting in a tax liability of ₹88,200, which is 12% of ₹7,35,000—a significantly higher tax burden.
This example highlights how the Margin Scheme not only reduces the final tax outflow but also makes the pricing of used vehicles more competitive in the market.
Business Benefits of Margin-Based GST: How It Helps Used Vehicle Dealers Thrive
The introduction of the Margin Scheme under the GST framework has had a transformative impact on the used vehicle dealership industry, particularly for pre-owned car dealers. Here’s a deeper look at how it promotes business efficiency and compliance:
✅ Reduced GST Liability
One of the most significant benefits of the scheme is the lower tax incidence. Since GST is levied only on the profit margin, the overall tax payable is substantially less compared to the full transaction value method. This makes it cost-effective for dealers and enhances the affordability of used cars for consumers.
✅ Encourages Competitive Resale Pricing
With lower tax burdens, dealers can offer more competitive pricing without compromising margins. This increases sales volume, stimulates demand in the secondary automobile market, and promotes faster movement of inventory.
✅ Simplified Compliance Mechanism
The Margin Scheme provides a clear and straightforward valuation method, especially where ITC is not claimed. Dealers can confidently compute GST based on their margin, avoiding complicated assessments and litigation risks. It also reduces bookkeeping complexity, since they don’t need to track or claim ITC for such transactions.
✅ Supports a Transparent and Organized Used Car Market
By regulating the tax on second-hand vehicles through structured rules and notifications, GST ensures greater transparency, compliance, and professionalism in a sector that has long operated in informal settings. This builds trust among buyers and improves the credibility of dealers.
Rate of Tax on Second-Hand Vehicles – A Legal and Practical Overview
The taxation of second-hand motor vehicles under the Goods and Services Tax (GST) regime in India has been a matter of significant interest and reform. To provide clarity and ensure ease of doing business in the resale sector, particularly for used cars, the Government of India issued Notification No. 08/2018 – Central Tax (Rate), dated 25th January 2018, in exercise of its powers conferred under Section 11(1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act).
This Notification provides partial exemption to registered persons dealing in second-hand goods, whereby GST is levied at concessional rates, subject to certain conditions, most importantly the non-availment of input tax credit (ITC) on the purchase of such goods.
Legal Framework
Section 9 of the CGST Act, 2017 is the charging section for the levy of Central GST on intra-State supplies. Read with Section 11(1), the Government is empowered to exempt, either absolutely or subject to conditions, certain goods or services from GST, based on the recommendation of the GST Council.
Pursuant to this authority, Notification No. 08/2018 was issued to reduce the applicable GST rates on the supply of old and used motor vehicles, when such supply is made by a registered dealer who satisfies the eligibility conditions stated in the Notification.
This move was primarily to avoid the cascading effect of taxation—often referred to as “tax on tax”—and to facilitate a smoother and more affordable used vehicle market.
Essential Condition – Non-Availment of ITC
As per the proviso under paragraph 2 of Notification No. 08/2018 – CT (Rate), the concessional rate shall apply only if the supplier has not availed input tax credit on the purchase of such used goods. This includes ITC under:
- Section 16 of the CGST Act (regular ITC on goods used in the course or furtherance of business),
- CENVAT Credit under the CENVAT Credit Rules, 2004 (pre-GST regime),
- Input tax credit of VAT, or
- Any other input tax credits under any earlier laws.
Thus, if ITC has been availed on the purchase of the used motor vehicle, the benefit of the concessional rate shall not be available, and GST will be levied at the standard rates applicable to new vehicles.
Rate Structure as per Notification No. 08/2018 – CT (Rate)
Below is the classification of second-hand vehicles and the corresponding concessional GST rates and compensation cess applicability:
| Sl. No. | Description of Motor Vehicle | GST Rate (CGST + SGST) | Compensation Cess |
| (i) | Old and used petrol, LPG, or CNG driven motor vehicles of engine capacity 1200 cc or more and length exceeding 4000 mm | 18% (9% CGST + 9% SGST) | Nil |
| (ii) | Old and used diesel-driven motor vehicles of engine capacity 1500 cc or more and length exceeding 4000 mm | 18% (9% CGST + 9% SGST) | Nil |
| (iii) | Old and used Sports Utility Vehicles (SUVs) with engine capacity exceeding 1500 cc and ground clearance of 170 mm and above | 18% (9% CGST + 9% SGST) | Nil |
| (iv) | All other old and used motor vehicles not covered under (i) to (iii) above | 12% (6% CGST + 6% SGST) | Nil |
Note: These concessional rates are applicable only when the sale is made under the Margin Scheme as defined under Rule 32(5) of the CGST Rules, 2017, and where ITC has not been claimed.
Legislative Intent and Background
The rationale behind this rate structure is to provide relief to businesses dealing in second-hand goods, particularly old vehicles, which would otherwise face double taxation—first at the time of the initial sale of the new vehicle and again when sold as a used vehicle.
Without this exemption, GST would have been applicable on the entire transaction value (i.e., the selling price), resulting in an unjustified tax burden on both dealers and end consumers. The introduction of differential rates based on engine capacity and vehicle type ensures that the tax is equitably levied, aligning with the vehicle’s segment and market value.
No Compensation Cess on Used Vehicles
It is crucial to highlight that no Compensation Cess is levied under the Goods and Services Tax (Compensation to States) Act, 2017 on the sale of used vehicles, when such sale is made under the conditions specified in Notification No. 08/2018 – CT (Rate). This further reduces the tax burden on resellers and end consumers in the used vehicle sector.
Judicial Interpretations and Rulings on GST Applicability to Second-Hand Goods
The legality and operational framework regarding the taxation of second-hand goods—particularly old or used motor vehicles—under the GST regime has been subject to judicial scrutiny. Various courts and authorities for advance ruling (AAR) have clarified the scope, rate, and margin applicability provisions to ensure uniform compliance and interpretation of the law.
These pronouncements, while case-specific, lay down important jurisprudence under the CGST Act, 2017, particularly in connection with Section 9 (charging section), Section 15 (valuation provisions), and Rule 32(5) of the CGST Rules, 2017 concerning the margin scheme.
Below are three relevant legal rulings that significantly contribute to the understanding of GST on second-hand goods:
1. AAR – M/s. Aadhya Gold Pvt. Ltd.
(Advance Ruling No. KAR ADRG 06/2019, dated 25.01.2019)
Facts:
The applicant was engaged in the business of purchasing used gold jewelry from individual consumers and reselling it after minor processing. The core issue was whether GST was payable on the entire transaction value or only on the margin.
Held:
The Karnataka AAR held that the applicant was eligible to adopt the “margin scheme” under Rule 32(5) of the CGST Rules, 2017, since the goods were purchased from unregistered individuals and ITC was not availed on procurement. Consequently, GST was applicable only on the profit margin, and not on the full sale value.
Relevance:
Although this ruling pertained to jewelry, the legal ratio is squarely applicable to used vehicles as well. It reinforces that the margin scheme can be applied to second-hand goods dealers, provided the conditions of non-availment of ITC and supply of used goods as such or after minor processing are satisfied.
2. AAR – M/s. Chowgule Industries Pvt. Ltd.
(Advance Ruling No. GST-ARA-79/2018-19/B-05, dated 28.01.2019)
Facts:
The applicant was a car dealership engaged in the sale of second-hand vehicles, typically received in exchange under buyback schemes. The question was whether GST would be payable on the entire resale price or only on the differential margin.
Held:
The Maharashtra AAR ruled that the applicant, being a registered dealer, could avail the benefit of Rule 32(5) for the supply of second-hand vehicles, provided no ITC was claimed on the purchase of such vehicles. GST would thus be applicable only on the margin amount, i.e., the difference between the selling price and the purchase price.
Relevance:
This ruling squarely applies to used vehicle dealers and clarifies that buyback vehicles also qualify as second-hand goods. It validates the application of the concessional tax regime, as outlined in Notification No. 08/2018-CT (Rate) and Rule 32(5), subject to fulfillment of conditions.
3. AAR – M/s. Toyota Lakozy Auto Pvt. Ltd.
(Advance Ruling No. GST-ARA-35/2020-21/B-77, dated 21.10.2021)
Facts:
The applicant was engaged in both selling new vehicles and dealing in second-hand cars. The primary issue was whether concessional GST rates under Notification No. 08/2018-Central Tax (Rate) were applicable when the sale was effected under the margin scheme.
Held:
The AAR Maharashtra ruled that where the conditions under Notification No. 08/2018-CT (Rate) and Rule 32(5) were satisfied—namely no ITC on purchase, goods sold as such or after minor refurbishments, and supply by a registered dealer—then GST at the concessional rate is applicable only on the margin, with no Compensation Cess applicable.
Relevance:
This ruling affirms the co-existence of the margin scheme and concessional rates notification, ensuring that registered dealers can avail both benefits concurrently, subject to compliance with all stipulated conditions.
Conclusion: Margin Scheme under GST – A Step toward Fair Taxation in the Used Goods Market
The GST provisions applicable to second-hand goods, particularly through Rule 32(5) of the CGST Rules, 2017 and Notification No. 08/2018-CT (Rate), offer a practical, fair, and legally sound mechanism to tax only the actual profit margin on resale. This ensures that dealers of used cars and second-hand goods are not unfairly taxed on the entire sale value, especially when input tax credit (ITC) is not availed.
By focusing on the margin-based valuation method, the law promotes cost efficiency, simplifies compliance, and helps create a structured resale market—without compromising revenue for the government. The exclusion of compensation cess and the non-applicability of GST on negative margins further protect the interests of small and medium-sized dealers.
Judicial interpretations have upheld the intent of these provisions, reinforcing their credibility and utility in real-world scenarios. When properly applied, the margin scheme stands as a legally robust and compliance-friendly option for second-hand dealers across India.
For regular updates, case law analysis, and expert articles on GST law and taxation, follow TaxGroww – your reliable source for accurate tax insights and practical compliance strategies.