Dealership body appeals to govt to keep GST rate at 0.5-1% on used cars

The GST rate being applied on used cars is at the highest slab and incurs tax of 29-43%, which will push sellers to go to the unorganised market instead of the organised market.

Buyers looking at used cars at a dealership. Photo: IANS

Key highlights:

FADA requested the government to keep GST rate on used cars at a standard 0.5% or 1%

The original vehicle had already suffered the payment of the tax at the highest slab of GST, says FADA

Under GST it will be 29-43% of margin depending on type of vehicle

The Federation of Automobile Dealers Association (FADA) on Tuesday requested the government to keep the goods and service tax (GST) rate on used cars at a standard 0.5% or 1% of the sale price of the vehicle and not margin.

It said that that since the original vehicle had already suffered the payment of the tax at the highest slab of GST, a standard GST rate on pre-owned or used cars should be applied.

The lower rate of GST on used/pre-owned cars will promote this business activity in organised sector and lead to transparent reporting and increased tax collections by the States, it added.

It said that if a second hand dealer buys a used car for Rs 2 lakh and spends Rs 20,000 on refurbishing it, they will add another Rs 10,000 margin and sell it for Rs 2.30 lakh. However, the GST taken by the government on this will be Rs 8,700 to Rs 12,900 based on the type of car (29-43% on refurbishing plus margin).

Since there is no GST or refurbishing cost in the unorganised sector it is a better economic deal for a seller and buyer there, it said.

“Used car will be bought only when there is a minimum price difference of 20% on a 1 year car, 40% on a 3 year car, plus 10% each for years thereafter, over a new car. Within this fixed price, dealer needs to cover refurbishing, margin and GST costs,” FADA said.

“So the attempt is to keep purchase cost at a bare minimum or else the final price will not be attractive vis-à-vis buying a new car. The seller gets low price. Deprived of higher return he would have got from unorganised sector,” it added.

It further said that new car purchase is 30% through exchange of old cars in India. In the US it is 90% through exchange of old cars.

With every 4 years exchange rate in India it is expected to grow by another 10%.

While under VAT used cars incurred a tax rate of 0.5% to 14.5% on resale value in various states. In Kerala it was 0.5% on resale value.

It said that in States where VAT was higher than 5%, GST incidence is much higher.

Under GST it will be 29-43% of margin depending on type of vehicle. This equals to 3.5% to 5% on resale value. The manufacturer's margin to dealer is only 3% to 5%.

The user car industry grows at 15-20% annually and its growth is 1.4 times the new car market. Around 5 to 5.5 million used cars are sold annually and has 1.75 trillion turnover. But only 10% of the industry is in the organised sector.

FADA said that 5% of the resale value of a car is the refurbishing cost and a GST rate of 28% is being applied on refurbishing spares.

The group said that the refurbishing industry has the potential to earn Rs 2,450 crore for the government. It is about Rs 250 crore from the organised sector now.

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