The GST Council’s recent proposal to increase the Goods and Services Tax (GST) rate on small used cars, including pre-owned electric vehicles, from 12% to 18% has stirred concerns among dealers and buyers. However, branded used car firms and analysts believe this change may have only a limited impact on demand and affordability in the market.
This GST hike on small used cars—those under four meters in length with engines up to 1.2 liters—could increase the net cost of a used car by approximately 1%, according to industry experts. For small electric vehicles, the change is also expected to have a similar minimal effect.
Breaking Down the Impact on Dealers and Buyers
- Minimal Price Increase:
Dealers typically earn a margin of 6–8% on small used cars. For example, a dealer buying a used Maruti Swift for ₹4 lakh and selling it at ₹4.25 lakh will now face an additional GST of ₹1,500 (₹4,500 instead of ₹3,000) on the margin of ₹25,000. This may marginally raise the selling price but not enough to significantly deter buyers. - Branded vs. Unbranded Market:
Only about 10% of used car sales in India occur through GST-registered platforms like Maruti True Value, Cars24, Mahindra First Choice, Droom, and Spinny. The unorganized sector dominates the market, meaning the overall impact of this GST hike remains negligible. - Short-Term Affordability Concerns:
Dealers might partially transfer this additional tax burden to buyers. While this could momentarily affect affordability, analysts believe the market’s resilience will stabilize demand over time.
Industry Reactions and Observations
- Cars24 CEO’s Perspective:
“There will be some short-term impact as affordability may be affected. However, we expect the market to adapt quickly to the revised rates.” - Droom Founder’s Viewpoint:
“The net impact on the selling price will remain minimal for branded platforms. The unorganized sector, which constitutes the majority, will continue unaffected.”
Legal Context and GST Case Law Analysis
The GST framework allows taxing only the margin of profit for second-hand goods to avoid double taxation. In M/S A.M. Motors vs. Commissioner of Central Tax, the tribunal clarified that dealers under the Margin Scheme cannot claim input tax credit (ITC) but are liable to pay GST only on the difference between the purchase and resale price. This ruling protects the interest of small-scale used car dealers, ensuring that the tax burden remains manageable.
Conclusion
Despite initial concerns, the proposed GST hike on used small cars is unlikely to disrupt the overall market. Branded platforms may see a slight dip in affordability for buyers, but with only 10% of sales occurring through GST-registered platforms, the larger unorganized sector remains unaffected.
India’s resilient used car market is expected to absorb these changes with minimal disruption, ensuring continued growth for both dealers and buyers.