Impact of 18% GST hike on second-hand cars: What it means for buyers and businesses

The GST Council’s recent move to increase the Goods and Services Tax (GST) on used cars from 12% to 18% has stirred anxiety within the pre-owned car sector.

Announced on Dec 21, the decision is part of the Council’s broader vehicle tax policy aimed at standardizing rates across categories.

Under this revision, pre-owned petrol, Liquefied petroleum gas (LPG), and Compressed Natural Gas (CNG) vehicles with engine capacities of 1200cc or more and lengths exceeding 4000mm, as well as diesel vehicles with engines of 1500cc or more, will continue to attract the 18% tax.

Additionally, the hike now includes categories like older electric vehicles (EVs) resold by businesses, which were previously taxed at 12%.

The increased GST applies solely to businesses involved in reselling used vehicles. Private individuals buying or selling second-hand cars remain exempt from this hike and will continue transactions at the prior 12% rate.

However, industry stakeholders argue that the added tax burden on businesses could trickle down to consumers, raising the overall cost of purchasing pre-owned vehicles.

Industry leaders have voiced apprehensions about the potential fallout of this decision. Vikram Chopra, Founder of Cars24, emphasized the vital role used cars play in facilitating mobility, particularly in Tier 2 and Tier 3 cities.

"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," Chopra stated.

He further advocated for government policies that focus on sustainability and safety, suggesting that tax hikes are counterproductive. "We need clear policies and stronger implementation around responsibly dismantling end-of-life vehicles and incentivizing sustainable practices in the automobile sector," he added.

The used-car market in India is burgeoning but remains in a developmental phase. In FY23, the sector saw 51 lakh vehicles sold, generating $34 billion. Projections for FY28 estimate growth to $73 billion with sales of 1.09 crore vehicles.

However, analysts warn that the GST hike could stifle this growth by reducing affordability and increasing operational costs for businesses.

Pre-owned vehicles already come with higher maintenance costs, including spare parts and repairs, which attract an 18% GST. The additional tax on purchases might make second-hand cars less appealing for budget-conscious buyers, potentially affecting the broader affordability equation.

Electric vehicles, a growing segment in India, are also expected to feel the pinch. While EV sales surged by 90% in FY24 to 90,432 units, up from 47,499 in FY23, experts caution that the GST increase could slow the market's expansion. The already low resale value of EVs adds another layer of challenge for this segment.

The GST hike on used cars aligns with the government’s push for tax standardization, but industry leaders are urging a reconsideration of its impact on both businesses and consumers. Without intervention, the new rates could dampen demand, strain businesses, and hinder the sector’s potential for sustainable growth.