Explained: Sales Tax on used cars, how will it work?

The Federal Bureau of Revenue (FBR) recently announced sales tax on sales and purchases of used cars has been the buzz word, leading to a number of ambiguities.

According to FBR, under new regulations i.e. (SRO 931 (I)/2020) FBR will get a 17 percent sales tax on these transactions. “If an unregistered trader (non-filer) will buy a used car, then an additional three percent tax will be imposed,” FBR said.

However, the said SRO was unclear to many after which FBR issued a clarification regarding the levying of 17 percent Sales tax on the resale of used and refurbished vehicles.

“FBR has clarified that the existing law charged sales tax on full sale value which was harsh and excessive. On the request of business community who are engaged in such business and after seeking support of major chambers of commerce of the country, a clause was added in the Finance Act to provide relief and to encourage refurbishing of second hand vehicles,” said FBR.

“This relief is available to only registered persons in Sales Tax and is restricted to 17% of value addition made by such players. No unregistered person can deduct or demand such sales tax from a buyer. It is further clarified that only rules have been finalized now,” it added.

Clearing out the ambiguities

As per experts in the auto industry, this tax is not imposed on individuals selling cars but on car dealers and traders, and the dealers/ traders too will act as withholding tax collector of the new tax and will have to pay this tax only on the additional value gained on the invoice price.

Citing an example, the experts explained that if an individual purchase a car for Rs3 million and then after using it for one year, sell it to a car dealer for Rs3.6 million, and then the car dealer resell that car for Rs4 million, the dealer will have to pay to 17pc GST on Rs400,000 the dealer made in value addition if the dealer sells the car to a filer and an additional three percent while selling it to a nonfiler.

Experts said that car dealers however cannot claim input tax.

Consequences of the new taxes

The experts were of the view that the latest tax would further create confusion in the local auto market and urged the government to explain it in detail and remove all ambiguities to ensure a stable market and trade.

Furthermore, the experts voiced concerns that the latest rules would lead to an increase in cash dealings and the involvement of black money. The rates of used cars will increase which will not benefit the end-user.