New Delhi: The Goods and Services Tax (GST) Council’s decision to increase the GST rate on old and used vehicles to 18% has stirred discussions across the country. The revised rate, announced at the 55th GST Council meeting, applies to all old and used vehicles, including electric vehicles (EVs), sold by registered businesses. However, individuals who are not registered under GST remain unaffected by this change.
The decision has sparked debates as it comes at a time when India’s used car market is poised for growth. Many believe the move aims to tap into the rapidly expanding sector to boost government revenue.
While the increase in GST aims to streamline tax rates across different types of vehicles, earlier clarification by Finance Minister Nirmala Sitharaman on the issue left buyers and sellers unsure about how the new rates would affect them.
The Finance Minister said that GST is calculated on the difference between the actual price and the resale price.
“It is on that margin, the value between purchased price and resale price. Bought it for Rs 12 lakh, selling it for Rs 9 lakh in the name of a second-hand used vehicle; on the margin only this 18% has been put,” the Finance Minister said.
However, the explanation raised questions about how the margin would be determined and whether the increase in GST would ultimately lead to losses for sellers.
Individuals buying and selling old vehicles will still continue to be taxed at 12 percent.
“In a country with single-digit car ownership, policies that impact affordability, like the recent GST hike, can unintentionally slow down this progress,” said Vikram Chopra, co-founder and CEO of online used car marketplace Cars24.
The Council’s decision to hike GST rates comes when the sector is still nascent and growing. In FY23, a total of 51 lakh used cars were sold in India and the industry was worth $34 billion. From there, the sector is expected to grow to $73 billion and sell 1.09 crore used cars by FY28, according to the latest Indian Blue Book (IBB) report by ‘car&bike’ and ‘Das WeltAuto by Volkswagen’.
In a LinkedIn post, Chopra emphasised that used cars are the backbone of mobility for millions of Indians, especially in Tier 2/3 cities and rural areas, and the new GST may hinder the sector’s growth prospects.
The hiked rates will especially be painful because there are already other components that are taxed at a high rate.
Input parts and services used for repair and maintenance of second-hand vehicles already attracts 18 percent GST, which increases operational costs in the used car market, as per Amber Sayad, Head of the pre-owned cars business at Stellantis, the company that operates popular brands like Jeep, Maserati, Fiat and others.
“If the GST rate hike is implemented, the industry may face higher overall taxation on second-hand vehicle sales, potentially slowing down the demand in this segment,” Sayad said. Businesses, like a few ride hailing companies and other e-commerce players, that buy pre-owned cars to use them as a capital asset will face the brunt of increased tax rates, according to Sandeep Aggarwal, founder and CEO of Droom, a marketplace for used cars.
“In the last few years, due to ride-hailing, quick commerce, and food delivery, automobiles have become a significant asset to make money. For such businesses, buying used cars has now become more expensive,” Aggarwal said.
It is not immediately known how such companies will handle such expenses and if the higher costs will be passed on to the end consumer or not.
Other organised used car dealers that sell to smaller businesses will also likely feel the pinch.
