GST Council hikes tax on used small cars, EVs to 18%

The Goods and Service Tax (GST) Council meeting that concluded today approved an increase in the GST rate on used small cars, including electric vehicles, to 18% from 12%. GST is levied when registered dealers or persons sell a used car and is applied not on the value of the vehicle, but on the margin or profit made from the sale. It is not applicable in the case of unregistered persons

This decision equalizes the GST rates on small cars and electric vehicles with those on larger cars and SUVs. Before this change, used cars with engine capacities exceeding 1200cc were subject to an 18% tax. Conversely, those with engine capacities up to 1200cc were taxed at a lower rate of 12%.

The GST council has recommended "to increase the GST rate from 12% to 18 % on sale of all old and used vehicles, including EVs other than those specified at 18% - sale of old and used petrol vehicles of engine capacity of 1200 cc or more and of length of 4000 mm or more; diesel vehicles of engine capacity of 1500 cc or more and of length of 4000 mm and SUVs," the government said.

The used-car market has grown significantly over the last couple of years. The industry is estimated to have sold over 5 million units in 2023-24. The rise of certified pre-owned programs by OEMs like Maruti Suzuki's True Value, Mahindra & Mahindra's First Choice, Volkswagen certified pre-owned, and online startups like Spinny and Cars24 along with better financing options, aided growth in this segment.

The new change in the GST rate will have an impact on registered dealers. A significant part of used car sales still happens through unorganized sellers who are not registered. The new hike in the tax rate could further widen the price gap between vehicles sold by organized and unorganized players.

Earlier, the GST on the sale of old cars was 28%, and there was an additional cess ranging from 1-15%. In 2018, the GST council made a significant change by reducing the GST on used cars to a range of 12-18% and removing the additional cess.

Original equipment makers have said the booming used car market has been impacting the sales of the entry-level or small car market, which has been struggling to grow. The demand for entry-level cars, or small cars, which were once the major growth driver for the new passenger vehicle industry, has been among the most impacted after the pandemic.

With the substantial rise in new entry-level car prices over the last couple of years, consumers are now paying a premium for the size and features they desire. As a result, many are turning to pre-owned cars as a more affordable option. Some of the carmakers believe the average selling price of used cars has now grown to around Rs 4.5-5 lakh and is directly competing with the new entry-level cars.