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

The recent decision of the GST Council to impose an 18 per cent tax on the resale of used electric vehicles has been a bit of a mess. The explanation by Finance Minister Nirmala Sitharaman talked about a tax on the "margin value" of resales, misguiding people into believing that individuals selling their used cars would fall prey to this tax.

But this tax, in practice would be levied on businessmen trading in second-hand vehicle sales and not individual sellers.

Here is how GST Council has passed the recommendation about the tax payable by companies reselling automobiles Misunderstanding Over GST Increase

The panel cleared an 18 per cent GST on used EVs sold by businesses at the press conference following the 55th GST Council meeting on Saturday, against the earlier 12 per cent rate.

While clarifying that it would not be on the entire resale amount but only on 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."

Elucidating with an example, she said if a car is bought for Rs 12 lakh and sold as a second-hand car for Rs 9 lakh, the difference shall attract tax.

That created confusion since one will be levied for tax for selling a car when the resale is a loss on sale.

GST on used EVs was actually simplified

The Council did away with the concession and agreed to hike the GST on used EVs to 18 percent when sold by businesses. The tax, however, applies only on the margin value.

For example, if a used car dealer buys an EV for Rs 9 lakh and sells it at Rs 10 lakh, the tax will be paid only on Rs 1 lakh profit margins. Direct deals between two individuals remain exempt.

This is just bringing the used electric vehicles in line with similar but larger petrol or diesel-engined cars already having a tax rate of 18 percent.

To wrap this in a nutshell, all of these now mean:

No tax applies from GST for the end-customer: you may be selling a car purchased at Rs 12 lakhs sold off at Rs 9 lakh without GST payable.

GST for businesses: In the case of a dealer purchasing a car for Rs 9 lakh and selling it for Rs 10 lakh, the 18 per cent GST is charged only on the Rs 1 lakh margin.

This explanation came with an official release by the Council that said the decision was taken with an aim to make all motor vehicles, including used petrol, diesel, and electric vehicles, uniform in tax treatment.

Implications of the tax on used EVs

The move has left the second-hand EV market apprehensive, which was expected to become less attractive with buyers having to bear the increased margins to dealerships being taxed.

Whereas new EVs would continue to enjoy a 5 per cent GST for incentivising their adoption, the change in tax treatment relating to resold EVs could lead to further hurdles in incentivising the usage of EVs.

GST exemption

The council also decided to keep ATF out of the "one-nation-one-tax" regime and thus would be taxed under the existing system.

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