The GST Council’s decision to impose a uniform 18 per cent tax on the sale of old and used vehicles is set to shake up India’s pre-owned car market. Previously, the tax ranged from 5 per cent to 28 per cent based on factors like model and engine type.
While the move aims to streamline taxation and bring in standard rates across segments, industry experts highlight growing distress as this adds to their growing bucket of costs, while straining their finances for organised industry players who already operate on thin profit margins.
Clearing the air
The revised structure has sparked confusion among dealers, with many misinterpreting the move as a tax hike. However, industry experts clarify that the government has merely unified the tax rate to 18 per cent per cent across all vehicle categories.
Many transactions under the 12 per cent tax slab went unreported as dealers avoided GST through cash payments. To curb tax evasion and streamline compliance, the government eliminated the dual tax structure.
However, players argue that the new uniform rate increases costs for businesses operating within the formal sector.
Walking a Tightrope: Thin margins, balancing costs
Unlike unorganised dealers, who often operate outside the GST framework, registered businesses must comply with tax regulations while ensuring competitive pricing.
Profit margins in the organised sector are typically around 3-4 per cent, making cost control even more critical, says a leading pre-owned car dealer.
Another challenge is the inability to claim input tax credits on refurbishment expenses. Unlike other businesses that can offset their costs against GST, used car dealers must pay the tax on margins without deductions for repairs, servicing, or enhancements.
“We invest heavily in refurbishing vehicles to ensure quality and reliability, but these costs cannot be offset under the GST system,” he added.
Warranty offerings have also become a challenge. “We used to provide warranties of up to 20 months. But with GST squeezing margins, we now offer them separately. Some customers opt for them, some don’t,” he added.
The gap between organised and unorganised dealers is still wide. Many small sellers remain unregistered, previously avoided taxation through cash transactions.
Who bears the cost?
The GST hike will particularly affect the used-car market for vehicles priced between ₹5 lakh and ₹7 lakh, potentially pushing prices up for consumers. A vehicle earlier incurred a 12 per cent tax on profit margins will now be taxed at 18 per cent, increasing costs for both businesses and buyers, noted by the Co-Founder & CFO of CARS24.
Higher GST costs may also be passed on to buyers, dampening demand. “The shift to 18 per cent for used EVs is particularly concerning, as it could make them less appealing in the second-hand market, especially when new EV’s are taxed at 5 per cent, explained by the founder of Big Boy Toyz who sell preowned luxury vehicles in India. “For us, as dealers in preowned luxury and high-end cars, the impact is minimal since we’ve already been operating under the 18% GST regime.” he added.
The company’s growth was primarily driven by strong performance in its core markets of India and the United States, while emerging markets in Southeast Asia and the Middle East also contributed significantly
“The government has not introduced a new tax but has merely unified the GST rate for used cars,” said, Founder and CEO of Chennai-based Marvar India Pvt Ltd, which runs the pre-owned vehicle business under Cars4All. “Many unorganised sellers who have never paid taxes mistakenly believe this is a new burden. But operating within the GST framework builds credibility with financial institutions.”
While the move is toward streamlining the industry, experts stress the need for greater awareness among used car dealers. “The government has been working toward formalisation, but delays in awareness campaigns have led to unnecessary confusion. More efforts are needed to educate dealers on the benefits of GST compliance,” says an official from a leading pre-owned vehicle business.
