India’s $32-billion pre-owned cars market is expected to witness a slowdown after the Goods and Services Tax (GST) Council decided to increase the tax rate on used cars from 12 percent earlier to 18 percent now, according to several industry stakeholders.
The GST council, on December 21, decided to hike the tax rates on all used cars, including electric vehicles. To be sure, the revised tax rates only apply to vehicles bought by businesses and on the value that represents the margin of a supplier (difference between the purchase price and selling price, including depreciated value if benefits claimed).
Individuals buying and selling old vehicles will still continue to be taxed at 12 percent.
“In a country with single-digit car ownership, policies that impact affordability, like the recent GST hike, can unintentionally slow down this progress,” said the co-founder and CEO of online used car marketplace Cars24.
The Council’s decision to hike GST rates comes when the sector is still nascent and growing. In FY23, a total of 51 lakh used cars were sold in India and the industry was worth $34 billion. From there, the sector is expected to grow to $73 billion and sell 1.09 crore used cars by FY28, according to the latest Indian Blue Book (IBB) report by 'car & bike' and 'Das WeltAuto by Volkswagen'.
He emphasised that used cars are the backbone of mobility for millions of Indians, especially in Tier 2/3 cities and rural areas, and the new GST may hinder the sector’s growth prospects.
The hiked rates will especially be painful because there are already other components that are taxed at a high rate.
Input parts and services used for repair and maintenance of second-hand vehicles already attracts 18 percent GST, which increases operational costs in the used car market, as per the Head of the pre-owned cars business at Stellantis, the company that operates popular brands like Jeep, Maserati, Fiat and others.
“If the GST rate hike is implemented, the industry may face higher overall taxation on second-hand vehicle sales, potentially slowing down the demand in this segment,” he said.
Businesses, like a few ride hailing companies and other e-commerce players, that buy pre-owned cars to use them as a capital asset will face the brunt of increased tax rates, according to the founder and CEO of Droom, a marketplace for used cars.
“In the last few years, due to ride-hailing, quick commerce, and food delivery, automobiles have become a significant asset to make money. For such businesses, buying used cars has now become more expensive,” he said.
It is not immediately known how such companies will handle such expenses and if the higher costs will be passed on to the end consumer or not.
Other organised used car dealers that sell to smaller businesses will also likely feel the pinch.
Organised players may feel the bite
The used car industry in India remains largely consumer-to-consumer (C2C) and is unorganised to a great extent.
In fact, the unorganised segment accounts for roughly 45-50 percent of the pre-owned cars market and the organised segment is responsible for about 20 percent of the transactions. C2C transactions make up the remaining 30-35 percent, as per the IBB report.
Players in the organised space, including online marketplaces such as Spinny, and Cars24, have already faced challenges in scaling over the past few years, partly due to the stiff competition from the fragmented unorganised markets.
A few organised players have also exited the space.
CarDekho, once a prominent seller of old cars, shut down its used car retail business last year after incurring heavy losses, coupled with high cash burn. High costs associated with parking, showrooms, and manpower were eating into its profits, the company had said at the time.
In parallel, players like Cars24 and Spinny have been looking at alternative ways to grow revenue streams and add more services.
After facing growth pangs in FY23, Cars24 reported a 25 percent increase in FY24 revenue to Rs 6,917 crore on the back of Rs 498 crore in losses.
The company, in August, launched a super app, aiming to bring its ancillary services including vehicle servicing, insurance payments, vehicle financing, chauffeur booking and FASTag distribution under one roof and expand income streams.
Its rival, Spinny also reported a reduction in losses and 14 percent increase in revenue in FY24 to Rs 3,725 crore after the company merged its budget and luxury car offerings – Truebil and Spinny Max – last year. As a result, it let go of around 300 layoffs, Moneycontrol had exclusively reported. The company, like Cars24, also cut back on its marketing costs, as companies aim to put themselves on a profitable path.
Queries sent to Spinny did not elicit a response.
EV adoption in a slow lane
The impact of the new GST rate is expected to be more pronounced in India’s nascent EV sector, where the market, though small, is growing at a rapid pace.
According to data from the Society of Manufacturers of Electric Vehicles (SMEV), total four-wheeler EV sales stood at 90,432 units in FY24, a significant 90 percent increase from FY23 when total sales stood at 47,499.
Industry watchers say that the increased tax may hinder adoption of EVs, which already suffer from poor resale values.
“A brand new EV, the moment it is driven out of a showroom, loses at least 20 percent of its value. Increasing GST on used EVs is going to put additional pressure on used EV values, which in turn is going to dissuade buyers from buying EVs,” a market analyst who tracks the EV and shared mobility space said while requesting anonymity.
While the heightened tax burden may impede the purchase of new EVs, a notable impact on the used EV market is unlikely, given its small scale.
“The secondary market for EVs is very small at the moment, so we do not expect any major impact in the near term. However, new EVs are taxed at five percent GST, which is a clear sign that the government wants to drive up adoption of EVs. They should have extended a similar consideration to used EVs,” he said.
While organised players brace for impact from the new rate hike, industry stakeholders have urged policymakers to not just focus on taxation, but take steps to further growth in the used car market as well.
Rather than focusing on taxation alone, the government should look at the bigger picture. Used cars don’t just help individuals—they fuel economic growth by supporting thousands of small businesses, from dealers to service providers, and contribute to a circular economy by extending the lifecycle of vehicles, he said.
“The focus should be on making used cars a safer, greener, and more reliable option for consumers, not just taxing them further,” he concluded.
