Taxing times: Used cars platforms headed for a bumpy ride on GST hike

Bengaluru: After cruising at a double-digit growth rate over the past five years since the pandemic, India’s used cars platforms seem to be headed for a bumpy ride following the government’s decision to levy higher taxes on their margins on the sale of small cars.

The Goods and Services Tax Council on Saturday decided to increase taxes on the margins of the supplier on sale of small used cars, including electric vehicles (EVs), from 12% to 18%.

If a used car platform purchased a small car for ₹1 lakh and sold it to a buyer for ₹1.4 lakh after refurbishment, the platform will now pay an 18% goods and services tax (GST) on the margin ( ₹40,000) compared with 12% earlier. Second-hand SUVs (sport utility vehicles) and EVs were already charged 18%.

This move to harmonize tax slabs is likely to impact startup margins in the short term, even though they will be able to offset this against input tax credits.

According to industry experts, the 50% jump in taxes is likely to lend a blow to an industry that has sold 51 lakh units in FY23, according to the India Blue Book report released earlier in the year. This is against 42.3 lakh units of new cars sold in the same period, highlighting how India continues to sell more used cars than new each year.

“In a country where car ownership is still in single digits [in percentage terms], such policies can affect affordability,” said Vikram Chopra, chief executive officer (CEO) of online used cars marketplace Cars24.com.

While some platforms are expected to absorb the higher taxes, other noted that they will pass on at least a part of it to the retail buyer.

At present, used petrol, LPG, and CNG vehicles with an engine capacity of 1200cc or more and length exceeding 4000mm are taxed at 18%. Diesel vehicles with an engine capacity of 1500cc or more and SUVs with engine capacities exceeding 1500cc also attract 18% GST. But the latest decision would tax lower capacity vehicles also on a par with the others.

Prior to the proposed amendment, the GST on second-hand EVs was applicable on the complete sale value of the vehicle, according to Saurabh Agarwal, tax partner, EY. “Therefore, the proposed change should not be looked at as a deterrent for second-hand EVs,” he said. “This should in turn be a welcome step as it would likely bring down the cost for second hand EVs (till the time margins earned are less than 27.78% of the purchase price).”

“At best, it will increase the cost of second-hand small fossil fuel cars by 0.6% – 1.5% (assuming margins would range for 10% to 25% of purchase price),” he said.

Inventory issues

The decision by the GST Council headed by finance minister Nirmala Sitharaman comes at a time when dealers are grappling with record-high inventory of new vehicles after Diwali failed to rev up sales. Passenger vehicle sales in the country recorded a year-on-year fall of 14% in November as stringent emission norms coupled with enhanced safety features has dented affordability with the prices of entry-level cars going up by 3-4% in the past 24 months. This sharp jump in prices fuelled strong demand for used cars with potential buyers increasingly downgrading to second-hand vehicles.

“India’s used cars industry had been going through a metamorphosis with new operating models through organized retailers aimed at offering trust and transparency to the end users. The tax structures, too, should have ideally kept evolving. For example, players like us undertake significant refurbishment of cars to deliver high quality, the cost of which should be considered as a part of procurement while determining taxation,” said the promoter of a used cars platform requesting anonymity, adding that the decision is expected to have a far-reaching impact on EV sales as well.

“In EVs, new cars have lower GST (5%) and further enjoy state-based sops, while used EVs don’t have any such benefits and hence don’t present an attractive value proposition to potential car buyers,” he said.

According to industry veteran and former president of Federation of Automobile Dealers Associations Nikunj Sanghi, the decision could prove to be a blow to the organized players. “Nearly 70% of the used cars business is still in the unorganized sector,” he said. “It’s critical that a major part of this business shifts to the organized sector for the benefit and safety of both sellers and buyers. But this decision by the GST Council will only deter this from happening.”