The GST Council, comprising the Indian government and states of India, has just approved an increase in GST on used small cars, from 12 % to 18 %. Will this affect you? Yes, and no! Well, we’ll have to dive deeper to understand the implications of the GST rate hike on used small cars.
Here’s what the government had to say on the rate hike from 12 % to 18 % on used small cars (that measure under sub-4 meters with petrol engines smaller than 1.2 liters and diesel engines smaller than 1.5 liters),
The GST council has recommended to increase the GST rate from 12% to 18 % on sale of all old and used vehicles, including EVs other than those specified at 18% – sale of old and used petrol vehicles of engine capacity of 1200 cc or more and of length of 4000 mm or more; diesel vehicles of engine capacity of 1500 cc or more and of length of 4000 mm and SUVs.
If you’re an individual buying/selling to an individual, this GST rate hike won’t affect you.
Assume that you own a small, sub-4 meter car. Let’s assume that it’s the Tata Nexon. Selling this car to another individual buyer like you, say someone you met through OLX/Facebook marketplace/even offline will not be affected by the hike in GST. So, nothing changes for you.
Assume that you sell your Nexon at 5 lakh rupees, the buyer pays you five lakh and then gets the car registered onto her/his name by paying the applicable RTO fees for transfer of ownership. Likewise, the buyer in this case, isn’t paying any GST on the purchase. So, the GST rate hike will not affect transactions between two individuals.
If you’re an individual selling to a used car dealer/broker in the unorganised sector…
Again, if the broker/used car dealer isn’t registered as a business, and is carrying out dealings mainly in cash as an individual, the transaction will look like an individual-to-individual deal, which means the increase in GST rate won’t come into the picture. So, no higher GST applicable here as well.
If you’re a car aggregator like Cars24 or Spinny or Mahindra First Choice or even Maruti True Value….
The GST rate hike is applicable to you as you’re a business engaged in buying and selling used cars for a profit ‘margin’. The hike in GST rate will apply to your margin. Assume you buy a small car like the Tata Nexon from Person A at 5 lakh and sell it to Person B at 6 lakh, the previous GST you had to pay the government was 12 % or Rs. 12,000 (calculated on the 1 lakh margin you make). Now, if you sell the same car with the 1 lakh margin, the higher GST of 18 % comes into effect, increasing the amount you pay the government to Rs. 18,000.
Now, if used car aggregators pass this cost to the customer, then prices of used cars could increase. If they choose to absorb the hike in GST, then their profit margin reduces correspondingly. Alternatively, used car aggregators may also choose to bake in the extra GST into the price at which they offer to a seller of the car. This means the seller will end up getting lesser money. We’ll have to wait and watch to see how this plays out. Plain reading of the GST rate hike on used small cars indicates that prices of used cars at car aggregators are likely to go up.
The GST rate has been hiked on used electric cars too
The government charges only 5 % on new electric cars (sub-4 meter rule doesn’t apply on electric cars), as a measure to increase sales and adoption of electric mobility in the country. On used cars though, the GST has now been hiked to 18 % from 12 %.
So, if a used car aggregator such as Spinny, Cars24, Maruti TrueValue or Mahindra FirstChoice buys a Nexon EV at 10 lakh from a seller and then sells it at 11 lakh to a buyer, the GST charged on the margin of sale is now Rs. 18,000.
Also, the GST rate hike on electric cars applies to all electric cars irrespective of size. This is because there’s no sub-4 meter and over-4 meter classification of electric cars. All electric cars have the same rate of taxation: 5 % while buying and 18 % on margin while sold by a business (car aggregators).
GST rate hikes: Will they cause a slide in used car sales?
Unlikely. For instance, someone buying a car at Rs. 6 lakh isn’t likely to hesitate to buy if she/he has to pay Rs. 6,000 extra (thanks to the additional GST). Likewise, a seller who is selling to a used car aggregator is likely to absorb the impact of Rs. 6,000 should the aggregator decide to charge her/him the extra GST that the aggregator will not have to pay the government on their margin. Net-net, this move will make the cost of living higher in India but isn’t likely to affect sales of used cars.
Used car sales have been robust, and have in fact outpaced sales of new cars by quite a margin. Used car sales are growing at a compounded annualized growth rate (CAGR) of about 15 % while sales growth of new cars is under 10 %. Many who find new car prices quite exorbitant are going for used cars as they get to buy a higher segment car at a much lower price. For instance, a new Maruti Alto costs over Rs. 5 lakh.
For the same kind of money, the buyer can opt for a 3-4 year old Maruti Dzire – a compact sedan that is much larger, and significantly more feature-rich than the Alto. Clearly, used cars are still a lot more attractive despite the GST rate hike. The government, it seems, is trying to mop up money from wherever it can through an increase in taxation.
