The automotive industry in India is quickly evolving with the government changing the tax regime periodically to meet or adapt to the market demands. A fairly recent change is the proposition of an 18% Goods and Services Tax (GST) which applies to the sale of used cars by registered entities. This change has received much attention because it will affect not only buyers but also sellers in the used car segment.
In the past, used cars were taxed under different sets of rules which made them a headache for sellers when they had to deal with structures that relate to tax and on the buyer’s side of things they had to deal with structures that made up the final price tag. The latest in GST for used cars is the implementation of an 18% GST used cars on the margin (the price at which the car is sold, minus the claimed written down value of the car) for registered businesses.
In this blog we will try to dissect the 18% GST rule, analyse its pros and cons and use real life examples to explain how this new policy has influenced the market of used cars.
What Does the 18% GST Rule Mean?
The 18% GST rule pertains to second-hand vehicles bought from registered dealers In this system, the tax is paid only on the margin because the vehicle value is gradually reduced each year. The second is a depreciated value which is arrived at by deducting the purchase price and depreciation surrendered by the seller.
For example, if a used car is bought for ₹10,00,000 and the seller claims ₹2,00,000 in depreciation, the depreciated value becomes ₹8,00,000. If the car is then resold for ₹9,00,000, the margin is ₹1,00,000. The GST on this margin would be 18%, which amounts to ₹18,000.
In the same regard, please be informed that owners of second hand cars are not required to pay GST. The rule applies only to registered GST businesses that are in the business of buying and selling second-hand vehicles.
Who is Behind the 18% GST Rule for Used Cars?
The 18% GST rule has been launched by the Indian government and the finance minister, who has been Nirmala Sitharaman. While delivering the Union Budget Speech in the year 2024, Smt. Nirmala Sitharaman emphasised the necessity for intervention in the used car industry in the country for the creation of a fair and standardised market. Her statement was focusing on the truth that the GST on used cars will make the pricing structure more fair for little businesses, propelling them officially and making the taxation process easy.
Sitharaman also explained that this measure is consistent with the government’s overall goal of enhancing automobile compliance and boosting the ease of doing business in India.
Advantages of the 18% GST on Used Cars
1. Put Right Use Automobile Market
Another major benefit of the 18% GST rule is that the practice makes the used car market more transparent. Before this rule, the tax process for used cars was not well structured and was organised differently in different places, creating lots of confusion for the many people involved, both as traders and consumers. The new GST structure makes the pricing structure of cars more comprehensible to the buyers, and they know how much tax is imposed on the actual price of a car.
Since consumers are now able to understand the workings of the tax applied, they are better placed to make the right purchasing decisions with regard to price differences between various sellers.
2. A More Streamlined Tax System
The extension of the GST on the used car simplifies the tax computation for the traders in the sense that all the different taxes and duties that were in the past charged separately are now subsumed by this GST. Due to this simplification of the tax procedure, investors in used car businesses get to avoid most of the complications that are inclusive of the sale of secondhand vehicles, hence promoting the growth of the businesses.
More so, since GST is only paid on the margin and not the total price of a vehicle, businesses are charged a tax on their profit from the sale rather than the actual cost of the vehicle.
3. Working for the Formalisation of the Sector
The GST rule is advantageous to the registered businesses involved in used car dealing as it triggers more small and medium ‘used car’ dealers to register. When these businesses register for GST, they can do so legally and enjoy some of the perks of the structure, like claiming for input tax credit on acquisitions.
Such a formalisation of the used car market will go a long way in promoting a formal sector since the buyers and sellers will be protected.
4. Boosting Government Revenue
The GST on used cars also makes it possible for the government to tap more revenues from the automobile business. Through levying on the margin, the government ensures that it is able to get its tax revenue through the increasingly used car market excise without overburdening the retailers. It can be spent to finance infrastructures, develop policies, and other sectors of concern in the national economy.
Problems Associated with the 18% GST on Used Cars
Though getting multiple benefits from the introduction of an 18% GST on used cars, there are certain issues that may create problems for the dealers, buyers, and fluctuations in the market trends.
1. Price Increase for Consumers
Another source claims that the 18% GST rule could lower the price for consumers by increasing the price of the vehicles consumed from the registered dealers. It could be levied as a margin-based GST, and for this reason, it could be absorbed at the consumer end and result in an increase in the price of the final sale. The direct increase in the prices for used cars may make them unaffordable to a certain amount of dealers, hence affecting the buyers separately.
For instance, margin-based GST of ₹18,000 on ₹6,00,000 in the case of a used car dealer may put the last price tag one step higher, making the car costlier.
2. Burden on Smaller Dealers
The new tax rule might place additional pressure on smaller, unregistered dealers who were previously operating outside the formal tax structure. These dealers, who deal in used cars informally, may struggle to compete with larger, registered businesses that are able to comply with GST regulations.
Many smaller dealers may face difficulties in absorbing the additional cost of registration, taxation, and compliance. Some may be forced to increase prices to cover these new costs, while others may drop out of the market entirely.
3. Complexity in Tax Calculations
While the margin-based GST is intended to simplify the tax process, it can also create challenges for dealers who are unfamiliar with the nuances of the new rules. Calculating depreciation, determining the margin, and ensuring accurate tax filing can be tricky, especially for smaller dealers with limited resources.
For example, a used car dealer might face difficulties when calculating the margin on older cars or when there are discrepancies in vehicle documentation. These challenges could lead to errors in tax filings and potential audits by tax authorities.
4. Uncertainty Around Tax Enforcement
Although the introduction of the GST rule is intended to bring greater transparency to the used car market, the enforcement of these rules remains a significant challenge. If the authorities do not effectively monitor the implementation of GST, it could lead to tax evasion and the continuation of unregulated practices within the sector.
Lax enforcement could undermine the goals of the GST, particularly in terms of leveling the playing field for registered businesses. In such cases, legitimate businesses would face disadvantages as unregistered dealers continue to sell cars without paying taxes, creating an unfair pricing environment.
Examples of the 18% GST Rule in Action
Let’s take a closer look at how the 18% GST rule works with some examples:
Example 1:
- Purchase Price: ₹10,00,000
- Claimed Depreciation: ₹2,00,000
- Depreciated Value: ₹8,00,000
- Selling Price: ₹9,00,000
- Margin: ₹1,00,000
- GST Payable (18% of Margin): ₹18,000
- Final Selling Price to Customer: ₹9,18,000
Example 2:
- Purchase Price: ₹15,00,000
- Claimed Depreciation: ₹4,00,000
- Depreciated Value: ₹11,00,000
- Selling Price: ₹12,00,000
- Margin: ₹1,00,000
- GST Payable (18% of Margin): ₹18,000
- Final Selling Price to Customer: ₹12,18,000
In both examples, the GST applied is calculated only on the margin, which helps to keep the tax burden manageable for businesses while maintaining fairness in the pricing process.
Conclusion
The 18% GST rule on used cars is a significant step toward formalizing the used car market and increasing transparency in the industry. By introducing a margin-based tax system, the government has streamlined the tax structure for businesses, allowing them to comply with regulations more easily. However, the policy also comes with challenges, including potential price increases for consumers and the burden on smaller dealers to comply with the new system.
Ultimately, the success of this rule will depend on how effectively it is implemented and enforced. If the authorities can ensure consistent tax compliance, the used car market will become more regulated and efficient, benefiting both businesses and consumers alike.
Finance Minister Nirmala Sitharaman, in her Union Budget 2024 announcement, emphasized the need for fair taxation in the automotive sector and reiterated the government’s commitment to boosting the formalization of the used car market through transparent and straightforward tax policies. Her leadership in introducing this change aims to drive progress and innovation in India’s automotive industry.
At My Car Wisdom, we provide insightful and up-to-date information to help you navigate the ever-changing landscape of the car industry. Want to learn more about the impact of GST on used cars or need expert advice on buying your next car? Explore our detailed blogs, tips, and guides to make informed decisions. Stay ahead with My Car Wisdom – your trusted source for everything related to cars!
