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Published on:

January 7, 2025

Udeetta Sarma

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Basics of GST

Understanding GST on Second-Hand Cars in India: What Buyers and Sellers Need to Know

India has witnessed a massive boom in the used car market in the last few years. Factored by price, higher confidence in authorized distributors, and the growing stocks of second-hand cars in good condition, balance within this segment was achieved and had a strong space in the market. In fact, with the recent change in the GST for second-hand cars, the buyers and sellers would have a different thought process altogether.

This blog demystifies the complexities of GST on used cars, its impact, and salient aspects for constituents of the Indian automotive ecosystem.

Pre-Owned Car Market in India

In the 2023-24 period, around 55 million used cars were sold in the country. The primary force behind this growth is the need for affordable passenger cars.

This growth is primarily driven by car makers like Maruti Suzuki, Mahindra and Hyundai certified pre-owned car initiatives. The additional incentives they give people who buy from them, such as warranties, thorough inspections of the vehicles, and more favourable loans. Those appear to increase consumer confidence when buying used cars.

Overview of GST on Second-Hand Cars

Goods and Services Tax (GST) is a simplistic single indirect tax system for othe supply of Goods and Services in India, initiated in 2017. The tax under GST on secondhand cars differs from that on new vehicles at dealerships, where dealers also pay new tax on ex-showroom prices as per the category of vehicle.

On used cars, GST only applies to the profit margin of a dealer and is not charged on the entire selling price.

Here’s how it works

Profit Margin Basis

In the case of the sale of a used car by a registered dealer, GST is charged on the difference between the selling price and the purchase price.

Intra-bank Activity

Taxable only between registered dealers and buyers and exempt between private persons.

Recent Changes in GST for Used Cars

In its recent meetings, the GST Council notified the following changes which will be effective from December 2024 -

Uniform GST Tax Rate of 18%:

Previously, used cars attracted GST of either 12% or 18%, depending on their classification, small cars, SUVs or luxury vehicles. Currently, registered businesses pay an 18% flat GST on all used vehicles sold, including electric vehicles (EVs).

Effect on Electric Vehicles:

To encourage adoption, the GST on making new EVs remains at 5%. Used EVs are, however, now subject to 18 per cent of GST when businesses resell them.

The above changes will be effective from December 2024.

How GST is Calculated for Second-Hand Cars

The GST on used cars is levied on the dealer's profit margin:

Positive Margin:

In case of positive margin, If a dealer buys a car for ₹5 lakh and sells it for ₹6 lakh, the profit margin is ₹1 lakh, and an 18% GST on this ₹1 lakh makes a tax of ₹18,000.

Negative Margin:

There is no GST when a car is sold for less than its purchase price. If a dealer purchases a car for ₹5 lakh and sells it to a customer for ₹4.8 lakh, there will be no profit, hence, no GST.

This kind of taxation based on margins protects buyers and sellers from paying excessive taxes even if their profits are low or nonexistent.

To learn more about GST on used cars, you can refer to “GST on Used Cars”.

Special Considerations for Electric Vehicles

Electric vehicles are among the fastest-growing segments in India’s automotive market. Even though the government encourages the switching to new EVs with a lower GST charge of 5%, the resale market has emerged broken:

Higher Resale Tax:

The 18% GST on second-hand EVs sold by firms may put buyers off, especially if they’re spending big on high-end vehicles.

EV Ecosystem:

The second main effect is the importance of a healthy resale market for the long-term growth of EV adoption. It could also slow the development of the broader EV ecosystem, as the higher tax rate on used EVs may discourage resale activity.

You might also be interested in RCM on Vehicle Hire Charges under GST.

Impact of Revised GST on Buyers and Sellers

The revised GST structure has varying implications for different stakeholders:

For Dealers

Profitability Challenges: Low-margin transactions might get more difficult to profit from under the flat 18% GST rate. The tax may have a direct impact on dealers if they are forced to adjust prices significantly for them to absorb the tax.

Higher Compliance Costs: Businesses now need to maintain the accuracy of numbers used for margin calculation and ensure timely filing of the GST.

For Buyers

Increased Purchase Costs: Purchasers in some cases need to pay more because they will get the GST on second-hand cars, particularly if they are getting from confirmed merchants or associations.

For example, a ₹1 lakh profit margin also translates into an additional ₹18,000 in taxes.

Shift in Demand: Customers may lean more towards private sales where GST is not charged due to increased costs. But such private sales don’t include warranties and assurances, leaving buyers to make compromises.

Private Sales vs. Dealer Sales

There is a big difference between private sales vs. sales through registered businesses:

GST and Private Sales:

Private sales are between individuals and may have lower costs due to the absence of GST. But these deals carry risks, including no warranty and little recourse in disputes.

Dealer Sales:

GST is charged on all dealer sales which generally also come with more value such as quality assurance, certified pre-owned programs and financing.

Strategies for Stakeholders

For Dealers

Transparent Pricing: Communicating GST inclusion in your pricing to the buyers can instil trust.
Use Certification Programs: Dealers rely on warranties, inspections, and value-added services to justify costs to buyers.

For Buyers

Dealer VS private seller: You should evaluate the costs and benefits of buying from a dealer versus a private seller.
Tax Structure Knowledge Gives You An Edge: Knowing how the tax structure works helps you negotiate for the best price with the dealers.

For Policymakers

Avoiding Unintended Consequences: A reconsideration of the GST rate on used EVs can dovetail with the government’s larger philosophy of promoting sustainable mobility.

Future Outlook for the Used Car Market

The used car market in India is holding strong and expanding in a market where regulations are changing rapidly. However, the non-discriminatory 18% GST rate is a double-edged sword since it presents challenges but also sets a uniform bonafide mechanism exposing a visible business.

Major factors driving the market are:

Online Market Place: Car traders used to be in touch with people who wanted to buy used vehicles, but now the entire ecosystem has changed with the introduction of online marketplaces.
Certifications: These programs earn trust and give buyers an extra layer of confidence.

With the right changes by dealers, policymakers and buyers, the used car market is here to stay and be an important part of India’s automotive ecosystem.

Conclusion

The changes to the GST on used cars are a major boost for the used car market in India. Although this uniform 18% is challenging, it does provide certainty to stakeholders. This means that sellers and buyers working with the buyer side would need to pick their way through that and grasp this to understand tax implications and advantages for the general image and flipping the market.

However, it is vital that as the market matures, industry players and policymakers continue to work together, so that growth and sustainability continue for Indian consumers.

Simplify GST Compliance for Your Used Car Business with Swipe!

GST on second-hand cars can be cumbersome, Swipe brings you a simplified version of it! We guarantee that you can accurately calculate your profit margins, file correctly as a dealer or business owner, and never fall out of compliance with the current GST regulations.

With Swipe, you can:

Create a GST-compliant bill in a few seconds
Easily track sales, margins, and taxes.
Tax returns become easy with automated reports.

GST being complex should not slow your business. Make the Switch-act now on Swipe accounting!

FAQ

1. How is GST charged on used cars?

The GST will be levied on the dealer's profit margin - the difference between the selling and purchase prices of the vehicle. There is no GST payable in the event of a loss on the sale.

2. What is the GST rate applicable on used cars in India?

Regardless of the state where it is purchased, the GST rate for used cars is now set at 18%, starting in October 2023 for registered dealers, and includes electric vehicles (EVs).

3. Are private sales of used cars subject to GST?

No, GST is not charged on private sales/transfers between individuals which are usually cheaper but do not offer warranties or quality guarantees.

4. Does GST Have An Impact On The Resale Of Electric Vehicles (EVs)?

This has disincentivised resale activity (valued to be around 20-50 per cent of the original price of EV) and could hit the ecosystem of EVs in the country as the business class sells used EVs and they are taxed under 18 per cent GST.

5 . What are the benefits of certified pre-owned programs for buyers?

Manufacturer-backed certified programs offer warranties, detailed inspections and financing options, instilling buyers with a higher level of confidence in their purchase.

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