GST-on-Used

GST Council's 55th Meeting Sets 18% Tax on Used Cars and EVs: Key Impacts and Reactions

 

As part of a major update to the Goods and Services Tax (GST) structure, used vehicle car dealerships and all businesses selling used vehicles are now paying a flat 18% GST. It is for all categories such as petrol, diesel and electric vehicles (EVs) irrespective of their engine capacity, length or dimensions.

 

Previous GST Rates on Used Vehicles

 

Until recently, the GST on used vehicles was tiered:

 

  • Initially, the used petrol cars with engines under 1200cc and lengths below 4000mm, diesel vehicles with engines under 1500cc, and EVs were taxed at 12%.
  • Vehicles with engines exceeding the above capacities and lengths above 4000mm were taxed at 18%. 
  • These tax rates were applicable under the existing framework for second-hand goods, calculated either on the profit margin earned by dealers or the depreciated value of the car.

 

New GST Rates on EVs and Used Cars by Businesses

 

At the 55th GST Council meeting, the government announced a flat 18% GST for all used vehicles, EVs, and Zero Carbon Vehicles. The tax will be charged on the margin between the purchase and sale price or depreciation value claimed. It is a significant shift especially for EVs which were previously eyed with an only 12% GST.

 

Government's Response to Criticism

 

Critics have opposed the revised GST rates, saying that it will disproportionately hurt middle class buyers, and would dampen demand in the second hand vehicle market.

The GST Council, responsible for these decisions, includes finance ministers from all states and representatives from the central government. One third of voting shares is with the central government and the rest is with state representatives, each having 33.33% of voting shares. 

Decisions are therefore taken by a majority of three-fourths present, being essentially a collective decision rather than a single centre dominated one. 

 

Impact on Buyers and Sellers

 

The updated GST structure is expected to have a significant impact:

 

  • New EVs will continue to experience a 5% GST, benefitting first time buyers, while discouraging resale of EVs.
  • The price advantage that second hand purchases offer buyers of traditional fuel-powered cars may also be less pronounced, as the new GST rate on used goods represents a narrowing of the difference between the tax imposed on new cars at 28%.
  • This reduces the available amount of money to attract buyers, particularly to small dealerships.
  • The move comes as a surprise in particular for EVs, which are being pushed by the government to adopt green energy. These efforts would seem to contradict the increase to 18% for used EVs.

 

Conclusion: Impact on Sellers and Buyers

 

Revised GST rates on used vehicles and EVs will slow down demand in the second hand market, which will impact buyers and sellers in the process. New car sales should see a small surge, but overall it could be a bad thing for the fast growing EV resale market. Meanwhile, stakeholders wait to see potential revisions or relief measures continue.