The GST Council has approved a hike in the tax rate on used small cars, including electric vehicles (EVs), from 12 percent to 18 percent. This adjustment aligns the tax rates for small cars and EVs with those of larger cars and SUVs. Previously, used cars with engine capacities over 1200cc were taxed at 18 percent, while those under 1200cc were taxed at 12 percent. The new rate applies to all used vehicles, except for specific categories like large petrol and diesel vehicles and SUVs.
The rise in the tax rate is being presented as a move to standardise GST across all vehicle categories, including small cars, large cars, SUVs, and EVs, as stated by the Council. However, the justification provided by Finance Minister Nirmala Sitharaman has raised eyebrows. According to her, the tax on used cars is based on the margin between the original purchase price and the resale price. This means GST is calculated not on the resale price itself, but on the difference between the two prices. This approach seems illogical, as the resale value of a second-hand vehicle is typically determined by factors such as depreciation, the vehicle's condition, remaining lifespan, and current market demand for that particular brand, among other factors.
As a result, the resale value of a vehicle is not directly comparable to the original purchase price. Additionally, the revised tax rate applies only to registered dealers and individuals, but a significant portion of the used car market operates through unorganised or unregistered sellers. This could lead to a substantial price difference between vehicles sold by organised (registered) dealers and those sold by unorganised (unregistered) players in the market.
The used car market has seen significant growth, driven by certified pre-owned programs from major automakers and online platforms like Spinny and Cars24. However, the GST hike may impact registered dealers, as much of the used car market still operates through unorganised sellers, potentially widening the price gap between organized and unorganised players.
The rise in the GST rate follows a reduction in 2018, when the tax on used cars was lowered from 28 percent to 12-18 percent, with the removal of an additional cess. The booming used car market has also affected the sale of new entry-level cars, which have seen reduced demand, partly due to higher prices. Many consumers are opting for pre-owned vehicles, which now compete with new cars in the entry-level segment, where the average selling price of used cars has risen to around Rs 4.5-5 lakh.