Impact of GST Rate Hike on Used Car Sales in India

The Goods and Services Tax (GST) Council’s recent recommendation to increase the GST rate on the margin value of used car sales to 18% for certain vehicle categories has sparked widespread discussion. This change will affect petrol vehicles with engines of 1200 cc or more, diesel vehicles with engines of 1500 cc or more, and all-electric vehicles (EVs). Here's an in-depth look at the implications for businesses, individuals, and the used car market. 

What Has Changed?

Previously, the GST on used car sales was set at 12% on the margin value for larger vehicles, while smaller vehicles attracted 5% GST. Now, the GST Council has recommended a uniform 18% GST rate on the margin value for specified categories of vehicles, including:

·       Petrol vehicles with engines of 1200 cc or more.

·       Diesel vehicles with engines of 1500 cc or more.

·       All electric vehicles (EVs), irrespective of engine specifications or type.

This change is expected to impact both sellers and buyers of used cars, especially in the premium and electric vehicle segments.

 
Understanding the Margin Scheme

The margin scheme applies GST on the difference between the selling price and the purchase price of the used vehicle, rather than the full transaction value. This ensures that GST is levied only on the profit margin made by the seller (dealer or individual).

For example:

·       A used car purchased by a dealer for ₹10,00,000 is sold at ₹12,00,000.

·       The margin value is ₹2,00,000.

·       GST at 18% will now apply to this margin, resulting in a tax of ₹36,000.

Impact on Stakeholders

1.       Impact on Used Car Dealers

·    Increased Costs: Dealers will face higher tax liabilities, which may be passed on to buyers. This could lead to a rise in the selling price of premium and electric used vehicles.

·    Higher Compliance: Dealers will need to ensure precise record-keeping of purchase and sale values to calculate the margin correctly and avoid disputes. 

2.       Impact on Buyers

·   Higher Prices: Buyers looking for larger petrol and diesel vehicles or EVs in the used car market may face higher costs due to the increased GST burden.

·   Shift in Preferences: The higher GST might push consumers towards smaller vehicles or new car purchases, as the price gap narrows. 

3.       Impact on the Used Car Market

·   Slowdown in Premium Segments: The rise in GST could dampen demand for larger vehicles and EVs in the used car market.

·   Boost for Smaller Vehicles: Cars with smaller engines (petrol <1200 cc, diesel <1500 cc) are not affected by the new rate. This may encourage buyers to focus on these vehicles.

·   Reduced Margins for Dealers: To remain competitive, dealers may absorb some of the GST hike, impacting their profit margins.
 

How Will It Affect EV Adoption?

One significant concern is the inclusion of electric vehicles under the higher 18% GST bracket. The government has been actively promoting EV adoption to reduce carbon emissions and fossil fuel dependency. However, the GST hike may:

·   Reduce Affordability: Higher taxes on used EVs could deter budget-conscious buyers from switching to greener alternatives.

·    Slow EV Penetration: The used EV market, still in its infancy, might face growth challenges as higher GST makes pre-owned EVs less attractive.
 

Rationale Behind the GST Hike

The government likely aims to standardize tax rates and address revenue concerns. The decision aligns with the principle of higher taxes on higher-value goods, as larger vehicles and EVs typically cater to a more affluent customer base. Additionally, the move may reduce tax arbitrage between new and used car markets.

Expert Opinions

Experts have expressed mixed reactions to the GST hike:

·       Supporters believe the increase is justified for larger vehicles, as it promotes equity in taxation.

·       Critics argue that including EVs contradicts government efforts to boost sustainable mobility.

Conclusion

The 18% GST on the margin value of used car sales is a significant policy shift that will reshape the dynamics of the used car market in India. While it may streamline revenue collection and create a more uniform tax structure, the move could also pose challenges for dealers and buyers, particularly in the premium and EV segments.

For businesses, maintaining accurate records and adopting efficient tax compliance strategies will be crucial. Meanwhile, buyers should carefully evaluate their options, considering the potential price hikes for certain vehicle categories. As the market adapts to these changes, the long-term effects will depend on consumer behaviour, market adjustments, and further policy developments.