GST Rate on Used Cars: Simplifying Taxation or Burdening Buyers?

The Goods and Services Tax (GST) Council has introduced significant reforms affecting the used car market in India. A unified GST rate of 18% is now applicable to all old and used vehicles, including electric vehicles (EVs). This change replaces the earlier system of variable rates based on vehicle type and aims to simplify the tax structure, promote transparency, and streamline compliance.

Who is Liable to Pay GST on Used Cars?

GST is levied on registered businesses involved in the purchase and resale of old and used vehicles. These include car dealerships, resellers, and e-commerce platforms. However, private transactions between individuals are exempt from GST as they are considered non-commercial activities. Businesses must ensure proper invoicing and adherence to input tax credit provisions to offset tax liabilities effectively.

How is GST Calculated on Used Cars?

GST on used cars is charged on the margin, defined as the difference between the selling price and the depreciated value of the vehicle. Examples illustrate this calculation:

1. Positive Margin: Selling price of ₹8 lakh vs. depreciated value of ₹6 lakh results in a taxable margin of ₹2 lakh. GST at 18% applies to this amount.
2. No Margin: Selling price and depreciated value are both ₹5 lakh, leading to a margin of zero. In this case, no GST is applicable.
3. Negative Margin: Selling price of ₹4 lakh vs. depreciated value of ₹6 lakh results in a negative margin. No GST is levied.

These rules ensure fairness and focus taxation on the value added during resale, preventing double taxation.

Impact on the Used Car Market

The revised GST rate has mixed implications:

• Simplified Compliance: A uniform tax rate reduces confusion, especially for small dealerships and online platforms.
• Increased Costs: The hike from 12% to 18% could lead to higher costs for consumers, particularly in Tier 2 and Tier 3 cities, where affordability is a major factor.
• EV Resale Challenges: With new EVs taxed at just 5%, the 18% GST on used EVs may dampen demand in the resale market, creating a disparity.

Market Growth and Trends

India’s used car market continues to grow robustly:

• Valuation in FY 2022-23: USD 31.33 billion.
• Projected Growth by FY 2027-28: USD 70.48 billion, reflecting a CAGR of 16%.

Key Drivers:

1. Affordability: Used cars remain a practical choice for first-time buyers, particularly in smaller cities.
2. Digital Platforms: E-commerce platforms such as Cars24 and OLX Autos have revolutionized transactions with transparency and financing options.
3. Government Policies: Scrappage policies and emission norms encourage replacing older vehicles with certified pre-owned ones.
4. Electric Vehicle Surge: Despite challenges, the second-hand EV market is poised to grow with technological advancements and improving battery life.

Expert Opinions

According to Saurabh Agarwal, EY Tax Partner, the GST Council’s decision to align rates across vehicle categories reflects broader parity goals. Importantly, the margin-based taxation ensures fairness and avoids double counting of taxes.

Challenges and Concerns

1. Higher Tax Burden: The increased GST rate could reduce demand for used cars in rural and semi-urban markets.
2. Affordability Issues: Rising operational costs may force businesses to transfer the burden to customers.
3. Disparity in EV Taxation: A significant gap between taxes on new (5%) and used EVs (18%) could hinder the development of a sustainable resale ecosystem.

Environmental Considerations

While promoting tax parity, the higher GST on used EVs poses challenges:

• Operational Costs: Maintenance and resale costs rise due to the 18% GST.
• Sustainability Goals: Increased costs for second-hand EVs could counteract government efforts to promote eco-friendly mobility.

Conclusion

The revised GST rate on used cars simplifies taxation and promotes uniformity, but its broader implications require careful navigation. Businesses must adapt to pricing challenges, while buyers should be aware of the new tax structure’s impact on affordability. Policymakers may need to address disparities in EV taxation to foster a balanced and sustainable market.

Sources

1. CNBC TV18
2. Moneycontrol
3. India Today
4. Business Standard