One of the biggest tax reforms in the history of the country, GST has created ripples by integrating multiple taxes to create a unified tax regime in India.
Out of the four basic GST slabs created, car purchase comes under the 28% GST slab from 1st July 2017, including both new and used cars. Contrary to speculation in the market over the last few months, GST will in fact have a significant impact on the used car market.
The Price/Cost Conundrum
In the pre-GST era, dealers had to pay VAT, service tax, and cess at both state and central levels. But now the dealers have to pay a one-time tax of 28% – 43%. Used car dealers have to pay GST only on their margin, and can avail of input tax credits. In the short run, this extra tax will imply a huge cost burden on the dealers. Ironically, they can not increase the price of the cars as that will have an adverse impact on the sales, especially since new cars are going to cost less. The only possible solution is to reduce the input cost, by buying cars from sellers at a lower price. For example, a seller who would have expected to get Rs 3 lakhs for a car before July might be offered much less now.
In the long run though, dealers can reduce the price of used cars by passing on the tax credit to customers.
Registered Vs Unregistered Dealers
Both buyers and sellers, wanting a better deal, might now approach unregistered dealers. Unlike registered dealers, the unregistered dealers do not sell refurbished cars. Nor do they provide any post-sale maintenance or warranty. So, those who opt for unregistered dealers might end up getting substandard cars.
The growth and transformation of the used car market in India can be attributed to credible registered dealers and refurbished car marketplaces. The refurbished car market places provide high quality used cars along with on-road assistance and other post-sales services. In the short term, these dealerships will reduce the procurement price, as a result of which sellers will get less price for their cars. However, over the long term, the prices will stabilize as organized and credible players will pass on input credits to the customers.
Several used car dealers think the high GST rate on second-hand car transactions will directly impact their sales and revenue. While the entire country looks forward to a uniform tax structure to bring in transparency and trust, the used car market would certainly wish for the government to rethink and revisit the GST rate, at least for this segment, and iron out the unintended anomalies.