GST on Sale of Used Vehicles: A Guide on ITC & Depreciation for Finance Leaders

Navigating GST Implications on the Sale of Used Vehicles: Essential Insights for Finance Leaders

As experienced finance professionals—whether you're a CFO, Director of Finance, or VP of Finance & Taxation—staying informed about tax regulations is essential for smooth compliance, reducing liabilities, and keeping your financial reports accurate. A common area that can bring up questions is the GST treatment on the sale of used motor vehicles, especially when depreciation has been claimed under the Income Tax Act and Input Tax Credit (ITC) was not claimed at the time of purchase. This article is here to help you understand the key rules, calculations, and compliance requirements based on recent updates, making it easier for you to handle these details with confidence.

Understanding the Core Provisions

Under Goods and Services Tax (GST) regulations, the sale of used vehicles is classified distinctly depending on whether Input Tax Credit (ITC) was claimed at the time of acquisition. In cases where ITC was utilized (which is customary for vehicles such as trucks or large buses employed in commercial activities), the reversal procedures outlined under Rule 40(2) and Rule 44(6) of the CGST Rules are applicable, potentially resulting in the reversal or adjustment of previously claimed ITC.

However, the focus herein is on situations where Input Tax Credit (ITC) was not utilized—typically concerning passenger vehicles with a seating capacity of up to 13 (including the driver), such as automobiles, motorcycles, or auto-rickshaws. In these instances, Section 17(5) of the CGST Act precludes the availing of ITC. When depreciation has been claimed under the Income Tax Act, Goods and Services Tax (GST) is not applicable to the entire sale price but rather on the margin. This margin-based methodology serves to prevent double taxation and ensures consistency with the transferred economic value.

Key takeaways from the provisions:

• No GST on full sale value: Unlike general supplies, GST applies only to the positive margin.

• Loss scenarios: If the sale results in a loss, no GST liability arises, providing relief in depreciating asset disposals.

• Legal Basis: This is governed by Notification No. 8/2018-Central Tax (Rate) dated January 25, 2018, as amended by Notification No. 04/2025-Central Tax (Rate) dated January 16, 2025, which clarifies the margin computation for depreciated vehicles.

Computing the Margin and Written Down Value (WDV)

The margin is straightforward: Selling Price minus WDV as on the date of supply. The WDV must be calculated per the Income Tax Act's depreciation rules, using the reducing balance method at the applicable rate (e.g., 15% for cars).

• Date of Supply Matters: WDV is determined as of the exact sale date, not the financial year-end. For instance, a sale on October 10, 2025, requires WDV computation up to that date.

• Depreciable Base: Includes the purchase cost plus GST (since ITC wasn't claimed), ensuring depreciation captures the full economic cost.

• GST Rate on Margin: Typically 18% (or 12% for certain vehicles), applied only if the margin is positive.

This method ensures GST is charged only on the "value addition" or profit from the sale, making it fairer for businesses holding assets over time.

Practical Illustrations

To illustrate, let's examine two scenarios: one resulting in a loss and another in a profit. These examples assume a car (seating ≤13) purchased without ITC, with depreciation at 15% on a reducing balance basis.

Illustration 1: Sale at a Loss (No GST Liability)

Consider a car purchased on April 1, 2023:

Outcome: Negative margin means no GST liability. No reporting required in GST returns—this isn't classified as an exempt supply, so it doesn't impact your aggregate turnover calculations.

Depreciation Breakdown (for Reference): 

• FY 2023-24: ₹2,88,000 (15% of ₹19,20,000). 

• FY 2024-25: ₹2,44,800 (15% of ₹16,32,000). 

• FY 2025-26 (up to October 10, 2025): ₹1,41,786 (15% of ₹13,87,200 × 193/365 days).
  Total depreciation accumulates to ₹5,74,586, leaving WDV at ₹13,45,414.

Illustration 2: Sale at a Profit (GST on Margin)

Now, assume the same purchase details but a higher selling price of ₹14,50,000 on October 10, 2025:

Outcome: Positive margin of ₹1,04,586 attracts GST at 18% (₹18,825). Report the margin as taxable value and GST amount in GSTR-1.

Reporting and Compliance Considerations

• GST Returns: Positive margins must be reported in GSTR-1 (taxable value = margin, IGST/CGST/SGST as applicable) and GSTR-3B. Losses require no entry.

• Documentation: Maintain detailed WDV calculations, aligned with Income Tax records, to support audits. Use ERP systems to automate pro-rated depreciation for mid-year sales.

• Amendments Impact: The 2025 amendment (Notification No. 04/2025) emphasises precise WDV computation, reducing ambiguities in earlier notifications. Review your fixed asset registers to ensure compliance.

• Strategic Tip for Finance Leaders: When planning asset disposals, model scenarios to forecast GST impact. This can influence decisions on lease vs. buy or timing of sales to minimise tax outflows.

Conclusion

The margin-based GST regime for used vehicles provides a balanced approach by taxing only realised gains while enabling full depreciation benefits. For finance executives, this highlights the significance of integrated tax and accounting strategies—ensuring ITC decisions at purchase align with long-term disposal plans. With recent clarifications effective from January 2025, it is advisable to audit your vehicle fleet and update relevant policies. If your organisation engages in frequent asset turnover, consulting a tax specialist can further optimise outcomes.

Stay informed, and let's keep working together to manage our finances wisely in a constantly changing regulatory environment.

This post is based on interpretations of current GST provisions and is not a substitute for professional advice

Need of GST Notes | GST Invoice Number Length | Power of Officer Under GST | GST On Dry Fruits | GST On Society Maintenance