Published 26 October 2026
A business that sells its old car, a five-year-old machine or a lot of used computers often assumes there is no GST, because the asset was bought for use and not for resale. That assumption is wrong. Disposing of a business asset is a supply, and tax is due on it. What changes is the amount it is charged on. A used vehicle can be taxed on the margin alone, at a single rate, if no credit was taken on it. An asset on which credit was taken carries a floor: the tax on sale cannot be less than the credit taken, reduced for the time the asset was held. A dealer in second-hand goods can pay tax on the margin instead of the full price. The three rules have different conditions, and choosing the wrong one usually means either overpaying or receiving a demand.
This guide states the law as it stands on 23 October 2026, including the January 2025 rate change for used vehicles and the September 2025 amendment that tied the margin scheme to the new rate schedules.
Why the sale is taxable
Section 2(17)(d) includes in “business” the “supply or acquisition of goods including capital goods and services in connection with commencement or closure of business”. Clause (b) includes any activity “incidental or ancillary” to the main activity. Paragraph 4(a) of Schedule II provides that where goods forming part of the business assets are “transferred or disposed of … so as no longer to form part of those assets”, the transfer or disposal “is a supply of goods”. A sale for a price is therefore a supply under section 7(1)(a).
A disposal without consideration (an old laptop given to a school, for example) is a supply only through paragraph 1 of Schedule I: “Permanent transfer or disposal of business assets where input tax credit has been availed on such assets”. If no credit was taken, a free disposal to an unrelated person is not a supply.
Used vehicles: tax on the margin, at 18 per cent
The notification. Notification No. 8/2018-Central Tax (Rate) of 25 January 2018, issued under section 11(1), exempts the central tax on intra-State supplies of old and used motor vehicles. The exemption covers so much of the tax as exceeds the rate in column (4) of its Table, applied “on the value that represent margin of the supplier”. The Integrated Tax counterpart is Notification No. 9/2018-Integrated Tax (Rate).
The rate. The Table has four entries: petrol, LPG and CNG vehicles of 1200 cc or more and 4000 mm or more in length; diesel vehicles of 1500 cc or more and 4000 mm or more; SUVs above 1500 cc; and “All Old and used Vehicles other than those mentioned from S. No. 1 to S.No.3”. Entries 1 to 3 have always carried 9 per cent central tax. Entry 4 carried 6 per cent until Notification No. 04/2025-Central Tax (Rate) of 16 January 2025 substituted 9 per cent “with immediate effect”. Since 16 January 2025, every old and used vehicle under the notification bears 9 per cent central tax plus 9 per cent State tax on the margin: 18 per cent in all. Notification No. 04/2025-Integrated Tax (Rate) made the same change for inter-State supplies.
What the September 2025 amendment did. Notification No. 12/2025-Central Tax (Rate), effective 22 September 2025, did not change any rate in the Table. It replaced the notification’s reference to “Schedule IV of Notification No. 1/2017-Central Tax (Rate)” with “Schedule II or Schedule III of Notification No. 9/2025-Central Tax (Rate)”. This was needed because the 2025 rate rationalisation superseded Notification No. 1/2017. Small cars now sit in Schedule II (9 per cent central tax). Other motor cars, and motorcycles above 350 cc, sit in Schedule III (20 per cent central tax). The effect of the amendment is that a used car whose new equivalent is now taxed at 40 per cent still pays 18 per cent on the margin. The 18 per cent rate on the margin dates from January 2025, not from the September 2025 changes.
The margin. The Explanation to the notification gives two methods.
- “in case of a registered person who has claimed depreciation under section 32 of the Income-Tax Act, 1961” on the vehicle: “the difference between the consideration received for supply of such goods and the depreciated value of such goods on the date of supply”;
- “in any other case”: “the difference between the selling price and the purchase price”.
In both cases, “where the margin of such supply is negative, it shall be ignored”. A business that sells a car below its written-down value pays no tax on the sale.
The notification still refers to section 32 of the Income-tax Act, 1961, which the Income-tax Act, 2025 repealed and replaced from 1 April 2026. It has not been amended to refer to the 2025 Act. Section 8 of the General Clauses Act, 1897 generally reads a reference to a repealed and re-enacted provision as a reference to the provision re-enacted.
The condition. Paragraph 2 of the notification provides that it “shall not apply, if the supplier of such goods has availed input tax credit” (or CENVAT credit, VAT credit or “any other taxes paid”) on the vehicle. For most cars this condition is met without effort. Section 17(5)(a) blocks credit on motor vehicles for transporting persons with seating capacity of up to thirteen (including the driver), except when used for further supply, passenger transport or driving training. For a goods carriage on which credit was taken, the notification does not apply, and the sale falls under section 18(6), discussed below.
Who can use it. The notification is not limited to dealers. A business selling its own staff car, a used-car dealer and a leasing company can all use it, subject to the no-credit condition.
Old assets on which credit was taken: the section 18(6) floor
Section 18(6) reads:
“In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher”
The prescribed reduction. Two rules deal with it. Rule 40(2) provides that, “for the purposes of sub-section (6) of section 18”, the credit is calculated “by reducing the input tax on the said goods at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods”. Rule 44(6) provides that the credit “for the purposes of sub-section (6) of section 18 relating to capital goods” is determined as in rule 44(1)(b): pro rata over the remaining useful life in months, “taking the useful life as five years”. Both rules are in force and name the same sub-section. They give different figures, because five points a quarter is twenty points a year, which writes credit off over five years in steps of whole quarters, while rule 44 runs month by month. The rules themselves do not say which prevails.
A worked illustration. A machine was bought on an invoice of 10 April 2023 with credit of Rs 1,80,000 and is sold on 20 October 2026. Counting three-month periods from the invoice date, the sale falls in the fifteenth quarter or part of a quarter. On rule 40(2), the credit is reduced by 75 percentage points, leaving Rs 45,000. If the machine sells for Rs 3,00,000, tax at 18 per cent on the transaction value is Rs 54,000, which is higher, so Rs 54,000 is paid. If it sells for Rs 2,00,000, tax on the transaction value is Rs 36,000, and the Rs 45,000 credit-based figure is paid instead.
Scrap. The proviso allows “refractory bricks, moulds and dies, jigs and fixtures” supplied as scrap to bear tax on their transaction value alone.
Transfer of the whole business. Where assets move with the business on a sale, merger or demerger, credit is transferred through FORM GST ITC-02 instead (ITC-02).
Dealers in second-hand goods: rule 32(5)
Rule 32(5) is a valuation rule for a different supplier: “a person dealing in buying and selling of second hand goods i.e., used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on the purchase of such goods”. For that person, “the value of supply shall be the difference between the selling price and the purchase price”, and a negative value “shall be ignored”. Rule 32(1) makes it available “at the option of the supplier”.
Rule 32(5) differs from the vehicle notification in three ways.
- It applies only to a person who deals in second-hand goods, not to a business selling its own assets.
- It changes the value, not the rate. The goods keep their normal rate on the margin.
- Its proviso deals with goods repossessed from an unregistered defaulting borrower. Their purchase value is deemed to be the borrower’s purchase price “reduced by five percentage points for every quarter or part thereof” between purchase and disposal.
The existing guide Value of Supply places rule 32 among the other special valuation rules.
What the seller needs before invoicing
| Item | Where it comes from |
|---|---|
| Purchase invoice and date for the asset | Books (fixed asset register) |
| Whether credit was taken, and how much, by tax head | Books and the GSTR-3B of the purchase month |
| Depreciated value on the date of sale, if depreciation was claimed for income tax (vehicles) | Income-tax depreciation schedule |
| The vehicle’s engine capacity, length and fuel type, to place it in the Table | Registration certificate |
| Sale price and buyer’s details (GSTIN if registered) | Sale agreement |
| For a dealer, the purchase price of each item resold | Purchase records |
Invoice, returns and timing
The invoice. A tax invoice under section 31 is issued before or at the time of removal or delivery of the goods. Under the margin scheme, the taxable value shown is the margin. The tax is computed at 18 per cent on it.
Time of supply. Under section 12(2), tax falls due on the date of the invoice or the last date by which it should have been issued. Notification No. 66/2017-Central Tax means an advance received for goods does not trigger tax before the invoice (Time of Supply).
GSTR-1. A sale to a registered buyer goes in table 4A. A sale to an unregistered buyer goes in table 7, or in table 5 for an inter-State invoice above Rs 1 lakh. The HSN summary in table 12 must agree with these. GSTR-1 is due by the 11th of the following month for monthly filers and the 13th after the quarter for QRMP filers (Filing GSTR-1).
GSTR-3B. The tax appears in table 3.1(a), auto-drafted from GSTR-1. The return is due on the 20th of the following month, or the 22nd or 24th after the quarter for QRMP filers, under rule 61. Where the credit-based figure under section 18(6) is the higher one, that amount is payable for the tax period of the sale. The portal steps are in Filing GSTR-3B and Paying the Tax.
Signing. A company verifies GSTR-1 and GSTR-3B with a digital signature certificate; other persons may use EVC (rule 26).
The buyer’s credit. A registered buyer can take credit on the tax charged, subject to section 16 and the blocks in section 17(5). A buyer of a car for staff use will usually find its credit blocked by clause (a).
Interest, penalty and corrections
Tax short-paid, whether because the margin scheme was used where credit had been taken or because the section 18(6) floor was ignored, carries interest at 18 per cent a year under section 50(1). It is recovered through the demand provisions. An under-stated invoice is corrected by a debit note under section 34; an over-stated one by a credit note, which must be declared by 30 November after the end of the financial year, or the annual return if earlier. The routes are in Correcting Mistakes in Returns.
The sequence for a seller
- Treat the sale of any business asset as a supply (Schedule II para 4(a)). Treat a free disposal as a supply only where credit was taken on the asset (Schedule I para 1).
- For a used vehicle on which no credit was taken, place it in the Table to Notification No. 8/2018-Central Tax (Rate) and compute the margin: sale price less depreciated value if income-tax depreciation was claimed, otherwise sale price less purchase price. Ignore a negative margin.
- Charge 18 per cent on the margin (9 per cent central tax plus 9 per cent State tax, or 18 per cent integrated tax) for supplies on or after 16 January 2025.
- For an asset on which credit was taken, compute the credit reduced for the quarters held (rule 40(2); compare rule 44(6)) and the tax on the transaction value, and pay the higher.
- A dealer in second-hand goods on which no credit was taken may value supplies at the margin under rule 32(5), at the goods’ normal rate.
- Issue the tax invoice, report it in GSTR-1 and GSTR-3B, and pay any shortfall with interest.
The next guide in this set covers Corporate Guarantees Between Related Parties.