GST on Used Cars: Reforming the Sector or Fueling Financial Strain?
The government’s recent move to standardize GST on used cars at 18% has sparked a wave of confusion and debate in the auto resale sector. Contrary to misconceptions, this isn’t a fresh tax hike but a unification of the earlier dual tax slabs—12% for smaller vehicles and 18% for larger ones—into a single rate aimed at streamlining compliance.
Why the Shift to a Flat 18%?
The rationale is rooted in transparency. Previously, several transactions slipped under the radar due to cash-based dealings, particularly in the 12% bracket. By removing the dual rate system, the government intends to:
- Plug tax evasion in the pre-owned car market
- Ensure fairer compliance across organized and unorganized players
- Boost tax revenue from a growing segment
As per CBIC’s clarification and the Finance Ministry’s 2025 Budget Note, this shift aligns with efforts to formalize informal sectors, following trends in retail and real estate.
Expert Insights: Pressure on Margins
Industry veterans have voiced concern over thinning margins. “With margins as low as 3-4%, absorbing 18% GST without input credits makes business difficult,” says K Mahalingam, Partner at T S Mahalingam & Sons. This sentiment is echoed across the sector, especially among players who invest heavily in refurbishing used vehicles.
Under the margin scheme per Notification No. 8/2018-Central Tax (Rate), GST is levied on the margin (difference between selling and purchase price), but input tax credit (ITC) on refurbishments remains ineligible. This limits cost optimization for organized businesses.
Legal and Regulatory Landscape
- Case Reference: M/s Mohit Minerals Pvt. Ltd. v. Union of India [(2022) 4 SCC 713] underlines the importance of clarity and proportionality in GST levy.
- Section 15 of the CGST Act, 2017 governs transaction value, but the margin scheme creates exceptions that affect used car dealers disproportionately.
As per the RBI Financial Stability Report (Jan 2025), the pre-owned car finance market has grown 18% YoY, signaling rising formalization and increased credit access for GST-registered dealers.
Challenges for Organized Dealers
- No ITC on Refurbishment: High refurbishing costs without input credits reduce profitability.
- Separate Warranty Charges: Warranties are now billed separately to maintain margins.
- Unfair Competition: Informal players, operating outside the GST system, maintain price advantages.
Opportunities in Formalization
Despite the short-term strain, experts like M Selvarathinam of Marvar India Pvt Ltd see long-term benefits:
“Uniform GST enhances trust among buyers and lenders, helping organized dealers grow sustainably.”
GST compliance opens doors to:
- Institutional financing
- Increased consumer trust
- Long-term scalability
Who Benefits & How:
- Business Owners: Better loan access, smoother audits
- Professionals: Clear invoicing, warranty assurance
- Freelancers: Affordable pre-owned vehicles with legit documentation
Conclusion
The flat GST on used cars is more than a tax tweak—it’s a structural reform. While it squeezes organized players in the short term, it sets the stage for a cleaner, more transparent resale ecosystem in the long run. The real task now? Spreading awareness and enabling smoother compliance.