In a huge fillip for the organised pre-owned car business, the move will lead to a 5 to 15 percent drop in used car prices and a resultant boom in sales.
20 Jan 2018 | 8131 Views | By Mayank Dhingra
In its consultation meeting on January 18, the GST Council revised the prevailing rates on trade of used cars, which fell in the highest 28 percent tax slab and had almost derailed the organised pre-owned car industry in the country over the past six months.
With implementation of ...
This is an Autocar Pro Plus article. Subscribe to continue reading.
In its consultation meeting on January 18, the GST Council revised the prevailing rates on trade of used cars, which fell in the highest 28 percent tax slab and had almost derailed the organised pre-owned car industry in the country over the past six months.
With implementation of the GST regime in India since July 2017, trade of used cars had been kept in the highest 28 percent (excluding cess) tax slab, similar to the tax levied on new cars. This effectively meant exponential rise in the amount of tax payable by registered dealers on used car sales as compared to the pre-GST scenario, where the tax stood significantly low and varied between 1-5 percent for most states and in some cases like Delhi, a 12.5 percent VAT was applicable on the difference between a dealer's cost of procuring (buying price - BP) of a second hand car and the invoiced selling price (SP) to its new customer.
Along with the applicable tax being low, the methodology also differed from state to state with the payable tax being merely 1 percent of the SP in Gujarat, 5 percent on the SP-BP differential in Himachal Pradesh and 1.875 percent, again on just the SP in Maharashtra.
The tax slab has now been reconsidered and used cars have been placed into the lower 18 percent and 12 percent GST categories. While large cars and SUVs (length greater than 4 metres, engine capacity bigger than 1.2 litres for petrol and 1.5 litres for diesel; and ground clearance over 170mm for SUVs) have been kept in the 18 percent GST slab, small cars (length under 4 metres, engine capacity below 1.2 litres for petrol and 1.5 litres for diesel) are placed in the 12 percent slab.
The revision immediately lowers the payable tax on used car sales from the earlier effective 53 percent (28% GST + 25% cess) on large cars and SUVs to 18 percent, and from 29 percent (28% GST + 1% cess) on small cars to 12 percent, thus, making the industry breathe a sigh of relief.
FADA and SIAM's persistance pays off
While key industry bodies including the Federation of Automobile Dealers Association (FADA) and Society of Indian Automobile Manufacturers (SIAM) were consistently pursuing the GST Council to revise the slabs soon after the announcement of the GST structure last year, the complexities of implementing such a big reform in the country's economic framework has seen the revision being announced only after six months of adopting the new tax regime.
However, considering the used car business as a special case, the GST Council had already positively standardised the formula to calculate the applicable tax amount on sale of pre-owned vehicles as being the differential between the selling price (SP) and the buying price (BP) paid by a registered used vehicle dealer across any part of the country. This eliminated confusion from state to state to a large extent. Also, person-to-person transactions were kept out of the bounds of any tax implications, just like it used to be before GST.
The country’s pre-owned car market stands 20 percent taller than the new car business, with more than 50 percent of the car buying population opting for a used car as their first purchase.
Scanning the pre-owned car space is a highly lucrative option for buyers in their search for the right set of wheels, with major metros accounting for close to 50 percent of the total used car volumes.
While the sector is largely unorganised (19%), the organised portion still finds hold on some 12 percent of the total market share, with the likes of Maruti True Value and Mahindra First Choice Wheels (MFCW) being the halo names.
The dramatic hike in tax rates after the advent of GST included a significant decline in the net profits earned by registered dealers on used car sales, leading to loss of business viability in a lot of cases, where a good sum of money is also initially spent on a car in adding value by refurbishing and bringing it back into top shape.
Speaking to Autocar Professional after the rollout of the GST structure, Dr Pawan Goenka, managing director, Mahindra & Mahindra, had revealed his concerns and said, “The new slabs would lead the taxes on used car sale margins to go up significantly, and the concerns are going to be two-fold. To preserve same amount of dealer margins on used car sales post GST, the prices of such cars would need to go up considerably, making them lose their value proposition as compared to new cars. Moreover, with person-to-person trade being out of GST’s context, it would promote more unorganised business in the used car space.”
The industry, which had clearly seen a rising trend of unorganised players moving to the organised channel to expand businesses in the recent past before GST, again went back to witness a gush in un-recorded trading of these vehicles in order to survive in a tough phase.
Speaking to our sister publication, Autocar India, Sugato Sen, deputy director general, SIAM, said, “We had raised the issue (of high GST on used cars) with the government in the pre-Budget consultation as well. Although we had asked for an even lower tax rate, we are very happy that our concern has been addressed to a large extent.”
“Vehicle sales in the organised used-car market, which were negatively impacted due to the high GST rate, will now see a revival,” Sen added.
Nagendra Palle, MD and CEO, Mahindra First Choice Wheels, said, “Reduction in tax will provide impetus to growing the pre-owned car industry, especially to the organised sector.”
“Earlier, used cars were not considered separately in the GST structure, although there are fundamental differences between the new car industry and the used car segment. Going ahead, the overall growth rates of the organized sector will be in the range of 25-30 percent per year,” Palle told Autocar India.
Some established players, which had put their expansion plans on hold, are taking the move as an extremely positive step. According to Jatin Ahuja, founder and managing director, Big Boy Toyz, a major luxury pre-owned car chain, “There is a sense of relief because the earlier GST rate was not practical. In fact, we were forced to put on hold our plans to expand operations to Mumbai.”
“However, with the revision in rates, we expect demand to pick up and we plan to expand our operations to Mumbai, Kolkata and Hyderabad in the next 24 months," Ahuja told Autocar India.
According to Mehul Agrawal, COO, CARS24, “The reduction in GST rates is an output of significant representation from the used car industry to the GST Council and shows a positive stance of the Government to rationalize GST by taking into account industry specific context. The move enormously benefits the premium car segment where the tax rates have been cut from as high as 53 percent to 18 percent.”
“The proposed change is expected to lead a drop between 5 to 15 percent in used car prices that benefits the buyers, and an expected increase in price upto 5 percent for the sellers,” Agrawal said.