NEW DELHI: The GST regime significantly impacts various sectors, including the used car market. Recent decisions by the GST Council on taxing used car resale spark intense debate among dealers, economists, and policy experts. Many question whether the policy is fair or if the government has overlooked critical industry nuances.
GST treatment for used cars varies based on transaction type. When an individual sells a used car privately, no GST applies, keeping private sales tax-free. Similarly, when a car owner sells a used car to a dealer, GST remains exempt. However, complications arise when the dealer resells the car. If a dealer sells a car for ₹11 lakh after purchasing it for ₹10 lakh, GST applies to the ₹1 lakh margin, which the GST Council classifies as a taxable “service.”
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Used car dealers express dissatisfaction with this approach, claiming it misrepresents their business realities. They point out that refurbishing cars involves repairs, servicing, and upgrades, all of which already attract GST. Dealers also pay GST on accessories installed to enhance a car’s appeal. Moreover, they incur interest costs while holding inventory, which gets embedded in the sale price but does not constitute a “service.” Dealers argue that taxing the margin as pure value addition ignores the fact that cars are depreciating assets.
The GST Council justifies taxing the margin to ensure businesses contribute their fair share. It treats the margin as value addition by dealers, captured as the difference between the buying and selling price. Critics, however, believe this logic oversimplifies the complexities of the used car market. They emphasize that the margin includes refurbishing costs, inventory holding costs, and only a small profit component, which should be the taxable portion.
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In December 2024, the GST Council increased the tax rate on the margin value of used cars from 12% to 18%. This hike affects all vehicle types, including electric vehicles, which previously enjoyed lower tax rates. Dealers fear the higher tax burden will reduce profitability and discourage buyers from using formal channels, potentially increasing unregulated private sales.
Critics argue that the GST Council errs in treating the entire margin as a service. They highlight double taxation, as GST is already paid on refurbishing costs. They also point out that margins partially reflect depreciation and operational costs, not pure value addition.
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To address these concerns, policymakers need to refine the implementation of GST on used cars. Excluding refurbishing and holding costs from the taxable margin, introducing a lower tax slab for the used car market, and providing clarity on “value addition” could resolve ambiguities and reduce disputes.