Goods and Services Tax (GST) may have made new cars more affordable but it will increase the prices of used cars, boost the unorganised market and wipe out smaller players from the organised segment.
According to used car operators GST on used cars is the same as new cars which is 28 percent and this is several times higher than the value added tax (VAT) during the pre-GST days.
Nagendra Palle, Chief Executive and Managing Director, Mahindra First Choice Wheels said, “There is no differentiation made under GST with regards to new or used cars. Like VAT GST is applied on the margins earned by the dealer and because of the high tax slab it makes the business unviable for the dealer”.
VAT was a state-levied tax and thus is not uniform in nature. While some states charged VAT in absolute terms others charge it on a percentage basis. Through the unorganised route several transactions happen in cash and, therefore, will slip out of the tax net.
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Mohan Mariwala, Founder and Managing Director, Auto Hangar, said, “Many of the small players in the organized market will have to shut shop because of the adverse impact of GST. This will give rise to sales through the unorganized route”.
Auto Hangar, which runs the authorized dealerships for Mercedes-Benz and Honda, also has a used-car channel for Mercedes cars. Mahindra First Choice with more than 1000 sales outlets is the largest organised multi-brand player in the country.
Organised players form 12 percent of the total used-car market, which is 3.3 million or 1.2 times the new car market. With the average used-car costing between Rs 2.5-3 lakh, India’s used car industry generates a turnover of more than Rs 80,000 crore.
In addition, GST will also impact the supply of cars into the second hand car market as the rates offered at ‘trade-ins’ will be lower than what were offered earlier. More than one-fourths of car buyers exchange their older cars for a new car which is called a trade-in.
“The used-car industry is bigger than the new car market and growing at a good pace. But it depends on the new car market for survival. Around 27 percent of new car buyers exchange their existing car for a new one. This, too, will get impacted. But we hope that the government will take a note of this and take corrective steps,” added Palle.
The used-car industry has been growing at a compounded annual growth rate of 15 percent during the last five years despite a lull in demand for new cars during the past 2-3 years. The availability of quality used cars at under Rs 3.5 lakh had led to stagnation of growth of entry-level cars priced in the same bracket.
GST, which was rolled out on July 1, has led to a fall of 2.4-14 percent on new cars, sports utility vehicles and other vehicles.
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