GST on Used Cars in India 2026: Mastering the Margin Scheme (Rule 32/5)

The used car market in India is booming, but for many dealers in hubs like Delhi, Mumbai, and Bengaluru, GST compliance remains a nightmare. With the latest updates from the 55th GST Council meeting, the rules have shifted.

If you are a registered dealer, selling a pre-owned vehicle isn't as simple as charging tax on the sale price. To stay profitable, you must understand the Margin Scheme. In this guide, we break down the law, the math, and the newest 2026 notifications.

The Big Change: Notification No. 04/2025

Previously, GST on used cars was a confusing mix of 12% and 18% depending on engine capacity and fuel type. As of January 16, 2025, the Government issued Notification No. 04/2025 – Central Tax (Rate), which standardized the rate.

• Uniform Rate: All old and used vehicles (including Electric Vehicles/EVs) now attract a uniform 18% GST on the margin.
• Margin Focus: This 18% is only applicable to the profit margin, not the full transaction value.

What exactly is the Margin Scheme (Rule 32/5)?

Under Rule 32(5) of the CGST Rules, a dealer can opt to pay tax only on the "value added." This prevents double taxation because the car was already taxed when it was sold as a new vehicle.

Conditions for the Margin Scheme:

1. You must be a registered dealer in second-hand goods.
2. You must NOT have claimed Input Tax Credit (ITC) on the purchase of the vehicle.
3. The vehicle must be sold in the same form (only minor refurbishment/repairs allowed).

Handling Losses and "Negative Margins"

What if you buy a car for ₹5 Lakhs but can only sell it for ₹4.8 Lakhs? In the eyes of the GST law, if the margin is negative, the taxable value is NIL. You do not pay any GST, but you also cannot use that loss to offset profits on other car sales. Every vehicle is treated as a separate transaction.

HSN Codes for Used Vehicles (2026 Update)

Vehicle Type	HSN Code	Rate (on Margin)
Motor Cars / SUVs	8703	18%
Two-Wheelers / Motorcycles	8711	18%
Commercial Vehicles	8704	18%

Common Mistakes Dealers Make

Through our work at EasyLedger, we’ve noticed three recurring errors that lead to GST notices:

1. Claiming ITC on Purchase: If you claim ITC, you lose the right to use the Margin Scheme. You then have to pay 18% on the entire sale value.
2. RTO Charges Confusion: Many dealers include RTO and Insurance charges in the taxable value. These should be treated as "Pure Agent" reimbursements to keep your tax liability low.
3. Incorrect Invoice Format: Your invoice must explicitly state that it is issued under the Margin Scheme (Rule 32/5).