GST is set to impact the pre-owned passenger vehicle business in India sizeably. The 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 market is a popular option for buyers scouting for the right set of wheels, with major metros accounting for close to 50 percent of total used car volumes.

While the sector is largely unorganised (19%), the organised portion still finds a hold in some 12 percent of the total market share, with the likes of Maruti True Value and Mahindra First Choice Wheels (MFCW) being the leaders in the business.

With the new tax rates on used car trade-off having been revised after the advent of the GST regime, effective July 1, the organised sector of the pre-owned car space is likely to be impacted adversely, with a sharp decline in the net margins after implementation of the new tax slabs.

Considering the business as a special case, the GST Council has 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.

Taking the case of the capital city of New Delhi, where the pre-GST tax applicable on the differential amount between the SP and BP stood at 12.5 percent of VAT, the same under GST has been revised to 28 percent for small cars and 43 percent (28% GST + 15% cess) on mid-size cars, luxury cars and SUVs, bringing tax on pre-owned cars on the same platform as the rates applicable on brand new cars being bought out of showrooms.

The straight implications of such a dramatic hike in tax rates include a significant decline in the net profits earned by registered dealers on used car sales, leading to loss of business viability in a number 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 shipshape condition.

Also, the rate increase is abysmal in case of many states, like Gujarat, where the pre-GST slabs imposed tax rates as low as 1 percent of the net vehicle sale value; Himachal Pradesh with its 5 percent tax on the BP & SP differential, and 1.875 percent of the sale value in Maharashtra.

According to Dr Pawan Goenka, managing director, Mahindra & Mahindra, “The new slabs would lead the taxes on used car sale margins to go up significantly, and the concerns are two-fold. To preserve the same amount of dealer margins on used car sales after GST, the prices of such cars would need to go up considerably, making them lose their value proposition as compared to new cars.“

“Moreover, the industry in the recent past had been seeing a rising trend of unorganised players moving to the organised channel to expand businesses. The high taxes now would again lead to more unrecorded trading," he added.

Hence, this would also lead to a substantial increase in more person-to-person (P2P) sales at individual level, owing to such transactions being completely non-taxable.

To keep the viability of the pre-owned vehicle trade businesses in check, the Society of Indian Automobile Manufacturers (SIAM) has recommended the GST Council to consider the rate on used vehicles to be not be more than 5 percent on the margins, keeping the rate flat across all segments, across the country.

The revision, however, is not expected to happen in the next few days, and the industry seems to be adopting a wait-and-watch policy to see how the dynamics evolve.