Impact of GST Rate Hike on Used Car Sales in India

The Indian automobile market, especially the pre-owned segment, has been buzzing with discussions following the GST rate hike on used car sales. The recent GST Council decision to raise the tax rate to 18% on the margin value of certain used cars, including premium petrol and diesel vehicles and electric vehicles (EVs), has triggered a significant shift in market dynamics.

This blog explores how this change impacts stakeholders, the rationale behind it, and what it means for buyers and dealers in the used car industry.

What is the GST Rate Hike on Used Cars?

The GST Council recently recommended increasing the tax rate on the margin value of specific used vehicles from 12% to 18%. This applies to:

• Petrol vehicles with engine capacity of 1200cc or more.

• Diesel vehicles with engine capacity of 1500cc or more.

• All electric vehicles, irrespective of their specifications.

The margin value represents the difference between the selling and purchase prices of a vehicle, ensuring GST is applied only on the dealer’s profit.

Understanding the GST Margin Scheme

Under the margin scheme:

• If a dealer buys a used car for ₹10,00,000 and sells it for ₹12,00,000, the margin value is ₹2,00,000.

• With the new GST rate of 18%, the tax liability becomes ₹36,000 (up from ₹24,000 at the previous 12% rate).

This increase impacts the cost of larger and electric vehicles in the pre-owned segment.

Impact on Stakeholders

1. Effect on Used Car Dealers

• Higher Compliance Costs: Dealers must maintain meticulous records to calculate margins accurately and comply with tax requirements.

• Profit Squeeze: To stay competitive, some dealers might absorb the increased tax, reducing their margins.

• Shift in Inventory Focus: Dealers may prioritize smaller cars or unaffected vehicle categories to avoid higher taxes.

2. Effect on Buyers

• Higher Prices: Buyers of premium petrol, diesel, and electric vehicles may see price hikes due to the increased tax burden.

• Preference for Smaller Cars: Consumers may shift towards cars with smaller engine capacities, as these remain taxed at lower rates.

• Impact on EV Adoption: Higher taxes on pre-owned EVs could deter budget-conscious buyers, slowing EV penetration.

3. Impact on the Used Car Market

• Slowdown in Premium Segment: The higher GST rate might dampen demand for larger vehicles.

• Growth in Budget Segment: Smaller cars, unaffected by the hike, might see increased demand.

• Market Consolidation: Smaller or unorganized players might face challenges adhering to compliance, leaving room for organized players to dominate.

Why Were GST Rates Increased?

The government likely implemented the GST hike to:

• Boost Revenue Collection: Higher taxes on premium goods can help meet fiscal targets.

• Standardize Tax Rates: A uniform rate reduces ambiguity and aligns with a progressive taxation approach.

• Encourage Smaller Vehicle Use: Taxing larger vehicles and EVs more heavily may indirectly encourage the adoption of smaller, affordable options.

Challenges for EV Adoption

The inclusion of EVs in the higher GST bracket raises concerns:

• Higher Entry Barriers: Budget buyers may hesitate to invest in pre-owned EVs due to increased costs.

• Contradictory Policy: The hike contrasts with government initiatives promoting EV adoption, potentially stalling market growth.

What Can Buyers and Dealers Do?

For Buyers

• Evaluate Alternatives: Consider smaller vehicles or new cars, as price gaps narrow.

• Negotiate Effectively: With dealers facing squeezed margins, there might be room for negotiation.

• Research Subsidies: Check for state-level incentives on EV purchases to offset higher costs.

For Dealers

• Optimize Inventory: Focus on cars unaffected by the hike to attract budget-conscious buyers.

• Streamline Operations: Invest in technology to manage compliance and maintain accurate records.

• Educate Buyers: Help customers understand the margin scheme to build trust and transparency.

Conclusion

The GST rate hike on used car sales has introduced significant changes in the Indian pre-owned vehicle market. While it helps streamline taxation and boost government revenue, it places added financial pressure on buyers and dealers, especially in the premium and EV segments.

The long-term impact will depend on how stakeholders adapt, whether through shifting preferences or embracing technology for better compliance. For now, buyers should plan their purchases carefully, and dealers must prepare for a competitive and evolving market landscape.