Tax reform worries India’s used-car dealers

29 Jun 2017

In India, a new Goods and Services Tax (GST) will go into effect on July 1 in what will be the country’s biggest tax reform in the past two decades.

Auto dealers of used cars are apprehensive that the Indian government’s decision to replace all existing indirect taxes at the state and union level with a steep, single tax (GST) may erode their profit margins. Unclear about the actual impact of GST on their industry, they are rushing to clear their stock before the new tax regime takes effect.

To allay dealers’ fears, revenue secretary Hasmukh Adhia gave his assurance that c-to-c trade of used cars won’t be treated as a taxable transaction under GST. The tax will apply only to registered, third-party auto vendors.

Close to two million used cars change hands each year – about the same number as new cars sold in the country – making it a $11 billion U.S. market, according to the Society of Indian Automotive Manufacturers (SIAM). In the past few years, the used-car market has grown at double the pace of the new-car business – from a reported 1.6 million units (worth $6 billion U.S.) in 2011 to roughly 3.3 million units ($15 billion U.S.).

With GST, these numbers are likely to change. The rate of GST will be the same for second-hand car transactions as for new cars, namely 29 percent for small cars and 43 percent for all other cars.

“This is steep compared to today’s tax laws,” said Umesh Hora, the chief financial officer at Jaipur-based GirnarSoft, owner of auto classifieds, such as Cardekho, Gaadi, and Zigwheels.  

“Typically, dealers of pre-owned cars operate at a gross margin of 10 to 12 percent – much higher than the 2 to 3 percent on new-car sales – but this has to cover their cost of rental, promotion, and refurbishment,” he explained. The current rates will affect dealers’ margins and they are likely to pass this cost to their customers,” he said.

Dhruv Chopra, chief marketing officer at CarTrade.com, told us: “Since dealers can factor in GST only on their margin and not on the full transaction value, and given the high rates, it seems logical that procurement prices will drop to reduce the impact of GST, since selling prices are dictated by the market and fluctuate within a fixed range.”

Therefore, one way or the other, the burden of tax will fall back on the person selling his car to a dealer. However, according to Dhruv, dealers may get hit in another way. It will now be far more attractive to sell a car directly to the end party rather than through a dealer. “This will be the case not just with used cars, but also with new-car sales, as a huge part of the new-car demand is driven by the ‘exchange’ route,” he explained.

Auto sites are helping dealers meet the new challenges of their business by developing innovative solutions, around GST. In any case, classifieds operators expect the impact of GST to be short lived. “In the long run, we expect GST to bring more transparency and promote more organized set-ups in used-car sales,” said Hora.

Also, as long as the value proposition of dealers (in terms of warranties and other support services) remains strong, classifieds don’t expect the market share of dealers to erode compared to direct c-to-c transactions.

Current taxes levied on auto transactions 

Table shows different types and rate of taxes levied on passenger vehicles/SUVs in India

Segment Excise *Nccd  +auto   cess VAT *Road

tax

*Motor vehicle tax Total CGST SGST TOTAL Difference
Small Cars <1200cc 12.50% 1.1% 14% State based State based 28%(approx) 9% 9% 18% 10%
Mid-SizeCars from 1200cc to 1500cc 24% 1.1% 14% State based State based 39% 9% 9% 18% 21%
Luxury Cars>1500cc 27% 1.1% 14% State based State based 42% 14% 14% 28% 14%
SUV’s >1500cc, >170mm ground clearance 30% 1.1% 14% State based State based 45% 14% 14% 28% 17%

Source: https://cleartax.in/s/gst-impact-automobile-industry 

Under the current tax structure, a car buyer has to pay excise followed by VAT, infra cess and (in some states) even octroi or green cess. GST will replace all these indirect taxes.

Update: Also read this take on the topic.

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Radhika Sachdev

Radhika Sachdev is a journalist who has held senior editorial positions with major Indian newspaper banners. She has over 20 years of experience in the profession, covering Advertising, Marketing, Media, Education, HR, Real Estate and Environment beats. She is also a partner and chief content developer for Write Solutions, a boutique content house she founded eight years ago, signifying her diversification from journalism to copywriting and media consultancy.