The Goods and Services Tax (GST) Council's decision to increase the GST rate on old and used vehicles to 18% has stirred discussions across the country. This revised rate, announced at the 55th GST Council meeting, applies to all old and used vehicles, including electric vehicles (EVs), sold by registered businesses. However, individuals who are not registered under GST will remain unaffected by this change. The decision is part of a broader attempt by the government to regulate tax rates across different types of vehicles. While the government aims to streamline the tax system, the timing of this decision has sparked debates, especially considering that India’s used car market is poised for substantial growth in the coming years.
India’s used car market has been expanding rapidly, and many people believe the GST increase is a move by the government to tap into this growing sector and boost government revenue. However, the decision has not been without controversy, particularly among buyers, sellers, and dealers, as there is considerable confusion regarding how the increased GST rate will impact their transactions. The complexity of calculating the tax on used vehicles has added to the concerns, with many questioning how it will affect the pricing of these vehicles and whether the new rates will result in financial losses for sellers.
Finance Minister Nirmala Sitharaman’s earlier clarification on the implementation of the revised GST rate has left many people uncertain about how the new rates will affect both buyers and sellers. According to the Finance Minister, the GST is calculated based on the difference between the actual purchase price and the resale price of the used vehicle. In simpler terms, if a vehicle is bought for Rs 12 lakh and sold for Rs 9 lakh, the GST would be applied to the Rs 3 lakh margin, which is the difference between the price the vehicle was bought for and the price it is sold for. While this explanation aimed to clarify the new policy, it raised several questions about how the margin would be determined and whether the new GST rate would cause sellers to incur losses.
Amit Malviya, the BJP’s National Information & Technology Department head, sought to clarify the matter further by explaining that the 18% GST would be applied only to the margin earned by dealers—the difference between the price at which the vehicle was purchased and the price at which it is sold. This ensures that GST is levied only on the value added by the dealer, which is considered a service under the GST framework. Malviya further emphasized that if the margin is negative, meaning the dealer sells the vehicle at a loss, no GST would be payable. This clarification aims to address concerns regarding how the tax will be calculated, particularly for dealers who might be facing difficulties in the pricing of used vehicles in a fluctuating market.
Malviya also pointed out that taxing the dealer’s margin is not a new approach. He noted that this method was also in place during the UPA era under the "Service Tax" regime, which continued until the introduction of GST in 2017. This explanation highlights that the method of taxing the margin rather than the entire value of the vehicle has been consistent over the years, even though the tax structure has evolved with the introduction of GST.
Before the revision, old and used petrol, LPG, or CNG vehicles with an engine capacity of 1200 cc or more, as well as used diesel vehicles with engines over 1500 cc, were already subject to an 18% GST rate. Similarly, old and used electric vehicles were taxed at a lower 12%. The latest decision to standardize the tax rate for all old and used vehicles, including EVs, at 18% reflects the government’s intent to bring uniformity to the tax structure. This change is aimed at eliminating disparities and streamlining the taxation process for the entire sector, creating a level playing field for all types of used vehicles, regardless of fuel type or engine capacity.
The timing of the decision coincides with the rapid expansion of India’s used car market. According to a 2023 report by Das Welt Auto and Car&Bike, the used car market in India was valued at USD 31.33 billion in 2022-23, and it is projected to grow to USD 70.48 billion by 2027-28. This sharp rise in the market is driven by a number of factors, including a growing middle class, higher disposable incomes, and an increasing demand for personal mobility. The report highlights that the average growth rate of the used car market between FY2017 and FY2022 was 6%, but it is expected to accelerate significantly in the coming years, with projections showing an annual growth rate of 16% between FY2023 and FY2028. This is in stark contrast to the new car market, which is expected to grow at a slower rate of 1% to 6% over the same period. The rapid growth of the used car market has made it an attractive sector for the government to focus on for potential revenue generation.
The GST increase is likely to have a significant impact on businesses involved in the sale of old and used vehicles, especially dealers. These businesses, particularly those that claim depreciation on purchased vehicles, will need to adjust their pricing strategies to factor in the higher GST rate. The new tax structure will likely lead to increased prices for consumers, particularly in the used car segment. However, the tax increase will not affect individuals who buy or sell vehicles privately, as they are not registered under GST. This means that while businesses will have to adjust to the new tax rates, private transactions between individuals will remain unaffected.
In conclusion, the decision to increase the GST rate on old and used vehicles is part of the government’s efforts to streamline tax rates and capture more revenue as the used vehicle market grows. However, the impact of this decision remains to be seen, especially in terms of how it will affect businesses and consumers in the sector. While the revised GST structure aims to simplify taxation, it has raised several concerns about its potential impact on pricing and margins, particularly for dealers in the used car market. As the sector continues to grow, it will be important to closely monitor the effects of the new tax policy on the industry and its participants.
