Vehicle dealerships carry one of GST’s heaviest rate structures and a couple of rules unique to the trade — the margin scheme on used cars and the treatment of demo vehicles. High ticket sizes make getting these right worth real money.
New vehicles: 28% plus cess
New cars are taxed at 28% GST plus a compensation cess that varies by vehicle type and size — so the effective tax on some vehicles is well above 28%. Two- and three-wheelers and commercial vehicles have their own positions. Because the ticket size is large, correct rate and cess application on every invoice is essential.
Used cars: the margin scheme
For second-hand vehicles, a dealer can use the margin scheme — GST is charged only on the margin (the difference between sale and purchase price), not the full sale value, provided no input credit was taken on the purchase. This dramatically reduces the tax on used-car sales when applied correctly, and is one of the most valuable things a used-car dealer can get right.
Demo cars, spares and workshop
- Demo/test-drive vehicles have specific input-credit conditions
- Spare parts are generally 28% or 18% depending on the part
- Workshop/service labour is a taxable service (18%)
- Insurance and accessories add further rate lines to segregate