GST Council To Decide On 18% Tax For Used EVs: Will It Drive Up Costs For Second-Hand Buyers?

If you have been considering a second-hand electric vehicle (EV) or a smaller petrol or diesel car to save money, potentially, there can be a bump in your road. According to a few reports, the Goods and Services Tax (GST) Council, in its upcoming meeting, scheduled to be held on December 20-21 in Jaisalmer, Rajasthan, is expected to discuss a proposal that could hike GST on old and used EVs and smaller vehicles from 12 per cent to 18 per cent.

The recommendation, made by the Council’s Fitment Committee, could impact the affordability of resale vehicles for budget-conscious buyers.

What is the Rationale behind this hike?

Says Shivashish Karnani, GST Division, DPNC Global, “Increasing the GST rate is a straightforward way for the government to generate more tax revenue from the used vehicle market. The Indian used car market is expected to rise in the next ten years due to rising disposable incomes and a growing middle class. So, the government is also looking to have an increased share in the rising revenue for the second-hand vehicle market.”

Currently, EVs are the government’s poster child for green mobility, benefitting from a concessional GST rate of 5 per cent on new vehicles. The lower tax was introduced to encourage the adoption of cleaner technologies and curb emissions. However, when it comes to the resale market, used EVs are taxed at 12 per cent, calculated on the supplier’s margin, the difference between the selling price and the purchase price (or the depreciated value).

Under the new proposal, used EVs and smaller vehicles, which currently attract a 12 per cent GST rate, could be reclassified into the higher tax bracket of 18 per cent, bringing them in line with larger vehicles like SUVs and petrol diesel cars with bigger engines.

For example, a second-hand EV priced at Rs 6 lakh, where a dealer earns a margin of Rs 1 lakh, currently attracts Rs 12,000 in GST. If the new rate of 18 per cent is announced, the tax will jump to Rs 18,000 - an additional Rs 6,000 for buyers.

This proposal comes at a time when the government is focused on increasing GST compliance and revenue but also risks making second-hand EVs less attractive, possibly denting their growing popularity among price-sensitive customers.

“The move aims to bring the tax rate on second-hand small vehicles in line with the GST rate applicable to new vehicles, which is 18 per cent for most categories. This seeks to remove any tax advantage for used vehicles over new ones,” says Karnani.

He further notes:

- Aligning the tax rates for used and new vehicles could create a more level playing field for both segments of the automotive industry

- The hike could be aimed at correcting any inverted duty structure issues, where the tax on inputs is higher than the tax on the final product (used vehicles in this case)

GST On Cars In India: An Overview Of Rates

GST on cars has been set based on four key factors, namely, engine capacity, fuel type, vehicle purpose (such as commercial or personal), and luxury features. 

The chart below shows GST rates on cars (based on engine capacity):

In addition to GST, some vehicles also attract a compensation cess, depending on their size, fuel type, and purpose. Here’s how it works:

Small Petrol Cars (<1200cc): 1 per cent cess

Large Petrol Cars (>1200cc): 22 per cent cess

Diesel Cars (>1500cc): Up to 22 per cent cess

Electric Cars: No cess at all

SUVs attract a 28 per cent GST. Luxury SUVs and those with a large engine capacity are also subject to additional cess rates of up to 22 per cent, depending on factors like engine size and ground clearance. Electric SUVs, however, are levied with the same 5 per cent GST as other EVs.

Will This Drive Up Costs for Second-Hand Buyers?

Says Karnani, “Yes, it will significantly increase the cost for secondhand buyers as the purchase price will rise due to higher GST liability. Currently, second-hand buyers enjoy GST rate at 12 per cent for small vehicles. This rate increase from 12 to 18 could make second-hand vehicles less affordable, especially for budget-conscious buyers who rely on the used market for their mobility needs.”

The increased cost could also lead to a slowdown in demand for used vehicles, potentially affecting sales and overall market activity.

For car buyers, this potential change underscores the importance of understanding how GST shapes vehicle pricing. Whether you are hunting for a greener electric car or a budget-friendly used hatchback, tax policies could soon influence your purchase decision more than ever before.