Taxes You Must Pay on A Used Car

Posted on: Mar 29, 2023 | 3 mins | Written by: HDFC ERGO Team

Taxes You Must Pay on A Used Car

Do you remember the different types of taxes that were applicable to buying cars? In a bid to minimise several indirect taxes, the government came up with GST or Goods and Services Tax. The GST made way for a single tax that was more uniform and came into existence in 2017. While the GST on new cars was relatively easier to understand, GST on used cars might not have been as straightforward in the initial phases.

Prior to the introduction of GST on second hand cars, dealers were required to make a payment of 5% as VAT on the transactions for selling a car. However, with the new tax regime, the calculation is different, as the taxes can be as high as 28% on used cars. Here is all that you need to know about car insurance for pre-owned cars if you are planning to buy one.

GST taxes on cars in India

The GST tax regime was introduced with the intention of a more uniform structure. GST replaced a lot of different taxes, making it easier for car owners to understand the structure. Following are the different tax slabs for cars in India.

1. Small cars:

India has an interesting category for small cars. Any car with a length of 4 metres or less and an engine size is less than 1200 cc for petrol engine cars, and 1500 cc for diesel engine cars qualifies as a small car. The GST for this category is 12%. A car buyer would end up paying 28% as taxes if the old regime were still active.

2. Medium-sized cars:

A bulk of the popular cars in India fall under the medium size car or mid-size car category. If you were to purchase a car from this category, you would end up paying 18% as GST.

3. Luxury cars:

As the name suggests, these are the cars that are produced by premium manufacturers and sports cars. The German trio of Audi, Mercedes and BMW are quite popular among luxury car buyers belonging to this category. Similarly, sports cars such as Ferrari and Lamborghini also fall under this category. And the GST on these cars is set at 28%.

GST rates based on the category of cars:

With the eradication of the previous tax regime, it is much easier to understand taxes for used cars now. GST on used cars depends on the type of car that you want to buy. Here is a list of the different types of cars that you can buy and the amount of taxes that these attract.

Type of car	GST rate in %
Petrol car having an engine displacement of up to 1200 cc	12
Petrol car having an engine displacement of more than 1200 cc	18
Diesel car having an engine displacement of up to 1500 cc	12
Diesel car having an engine displacement of more than 1500 cc	18

Tax rates on pre-owned cars:

GST on second hand cars was initially the same as those on new cars. However, the GST rates were reduced with the intention of giving a boost to the section of the used car. The updated GST on used cars is based on the type of car that you are planning to buy. If you are planning to buy a hatchback, the GST rate on the car will be 12%. Considering that a petrol engine hatchback has a displacement of 1200cc or less and a diesel engine hatchback has an engine displacement of 1500cc or less.

The GST on used cars is set at 18% for all cars that have an engine displacement of 1200 cc or more for petrol cars and 1500cc or more for diesel cars. This is a considerable departure from the earlier tax regime. Under this, a car buyer would end up paying 28% as effective taxes on buying a pre-owned car. Another point to consider is that new cars have an additional component of compensation cess. For used cars, there aren’t any such components. Thus, the effective tax rates are the ones that are mentioned in the above chart.

Compensation cess in GST:

A compensation cess is a charge that is collected on top of GST, and the GST Act introduced the cess. In the earlier tax regime, VAT was collected for the producing states, even if there was an interstate movement of goods. To compensate the producing states under the GST regime, the compensation cess was brought into effect. It is important to note that the compensation cess does not apply to GST on second hand cars.

How cars are valued for GST calculation

The calculation of taxes is usually based on the total price of a product. It is no different for used cars as well. The margin of supply value plays a crucial role in the valuation of the car, on which the GST rates are dependent. For a used car, tax calculations are applicable in the following cases.

1. A car buyer will need to pay GST on a used car if that is sold by the Central, State, or UT government or even a local authority.

2. Should a business person use a vehicle for their business and the cumulative turnover of the business is less than Rs. 40 lakhs, GST registration might not be required for the same. If the old car’s turnover is less than the set Rs. 40 lakh threshold, no GST is required to pay.

Insurance on used cars

Buying car insurance for a used car is equally important as paying GST on second-hand cars. The lack of insurance for a used car can present a lot of financial risks. To start with, the absence of third party insurance will attract a hefty penalty from the traffic police department. In the event of an accident, the liability of paying for the damages is entirely on you. This applies both to the damages on your car as well as any other vehicle that is involved in the accident.

If you are looking to buy second hand car insurance, a comprehensive plan might be your best bet. Comprehensive car insurance offers you all the coverage that one would need. It offers the benefits of third party insurance and covers damages to your car as well. If you want to enhance the coverage of the policy, you can opt for add-ons on a comprehensive plan.

Conclusion:

The inception of GST was eagerly watched by everyone. Primarily because it made way for a single tax instead of the several taxes that were collected earlier, if you are planning to buy a used car, it is pertinent that you are aware of the GST implications on the purchase. Above is everything that you need to know about GST on used cars. Apart from that, you must also purchase second hand car insurance. A car insurance plan will ensure that you can own the car without many hassles and keep you away from hefty repairs.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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