Applicability of sales tax

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RAJASHEKHAR.S.A

RAJASHEKHAR.S.A (Querist)
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10 November 2010 whether sales tax is applicale for sale of second hand car in the FY 2006-07. IF APPLICABLE WHAT IS THE RATE OF TAX.

Ajay Mishra

Ajay Mishra (Expert)
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10 November 2010 Second-Hand Goods

Second-hand goods are goods previously used by you or someone else.

The standard rules apply to transactions in second-hand goods between registered dealers. You will need to charge tax if you sell second-hand goods as part of your turnover, and will be entitled to claim tax credits for any DVAT paid on the purchase of second-hand goods.

Where the person from whom you bought the second-hand goods may not be registered (e.g. a private person selling his motor car to a registered dealer), there will be no tax charged and no tax invoice issued to you for the sale.

The law allows you to claim an input tax credit in such cases, provided:

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You, as a registered dealer, sell second-hand goods;
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You purchased the goods from a resident seller who is not registered for DVAT;
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You have adequate proof of the amount paid for the goods;
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The goods were purchased as stock for resale in the same form, or as raw materials for other goods; and
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The sale of the goods, or the goods into which they were incorporated, is liable to DVAT.

If you meet these conditions, the amount of the input tax credit allowable will be the least of:

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The input tax on the original cost of the goods when bought by the seller;
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The tax fraction (i.e., tax rate/(100+tax rate)) of the original cost of the goods to the seller;
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The tax fraction of the fair market value of the goods at the time of purchase of the goods by you; and
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The tax fraction of the consideration paid by you to the seller.

The tax credit can normally be claimed when you buy the second-hand goods. However, if the amount paid for the second-hand goods is more than Rs. 2,000, the input tax credit will be allowed only in the tax period when the goods are resold.

The following example illustrates the calculation of the input tax credit for second-hand goods:

Example

Arun is a registered dealer in Delhi. In December 2005, he purchases an item X from Navin for Rs 80,000. Navin had purchased the same item for Rs 100,000 plus DVAT of Rs 12,500 in April 2005. Let us assume that the Fair market Value of the item X was Rs 90,000. No tax is charged by Navin as he is an unregistered dealer. The tax rate applicable to item X at the time of sale is 12.5%.

Input Tax Credit available to Arun would be least of the following: (in Rs)

Input tax borne by Navin when he purchased the item
12,500

Tax fraction of the original cost of item X
(12.5/112.5 x 112,500)
12,500

Tax Fraction of the Fair Market Value of item X
(12.5/112.5 x 90,000)
10,000

Tax Fraction of the amount paid by Arun
(12.5/112.5 x 80,000)
8,889

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RAJASHEKHAR.S.A

RAJASHEKHAR.S.A (Querist)
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11 November 2010 Thank you very much Sir, this very useful you cleared all my doubts in this regard.

Once again Thank you very much Sir.

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