The government’s move to standardise GST at 18 per cent for all used vehicle transactions is likely to strain finances for organised industry players.

The recent changes in the GST structure for used car transactions have sparked confusion among dealers, with many misinterpreting the move as a tax hike. However, industry experts clarify that the government has merely unified the tax rate to 18 per cent across all vehicle categories. Previously, used cars were taxed at 12 per cent for vehicles under 4 meters and 18 per cent for larger ones.

Previously, many transactions under the 12 per cent tax slab went unreported as dealers avoided GST through cash payments. To curb tax evasion and streamline compliance, the government has now introduced a single 18 per cent tax rate, eliminating the dual tax structure.

With the new uniform rate at 18 per cent, businesses operating within the formal sector are now grappling with increased costs and tighter profit margins.

Unlike unorganized dealers, who often operate outside the GST framework, registered businesses must comply with tax regulations while ensuring competitive pricing. 

Industry experts point out that profit margins in the organized sector are already low—typically around 3-4 per cent—making it challenging to absorb the additional tax burden. “Now, with a flat 18 per cent rate, we have to work even harder to keep our costs low while remaining competitive,” says K Mahalingam, Partner, T S Mahalingam & Sons, a leading player in the pre-owned car space

A major challenge for organized dealers is the inability to claim input tax credits on refurbishment expenses. Unlike other businesses that can offset their costs against GST, used car dealers must pay the tax on margins without any deductions for repairs, servicing, or other enhancements made to the vehicles.

“We invest heavily in refurbishing vehicles to ensure quality and reliability, but these costs cannot be offset under the GST system,” he said. “This puts additional strain on our already thin margins, making it even harder to compete with unorganized players who do not incur similar tax burdens.”

Furthermore, warranty offerings have become more challenging. “We used to offer warranties of up to 20 months. However, due to GST affecting margins, we now offer them separately. Some customers opt for them, some don’t,” said Mahalingam.

The gap between organized and unorganized dealers is still wide. Many small sellers remain unregistered, having previously avoided taxation through cash transactions.

However, some industry players believe the uniform 18 per cent GST rate is a step toward formalizing the sector.

“The Finance Minister’s announcement has been misinterpreted. The government has not introduced a new tax but has merely unified the GST rate for used cars,” said M Selvarathinam, Founder and CEO of Chennai-based Marvar India Pvt Ltd, which runs the pre-owned vehicle business under Cars4All.

“Since many unorganized sellers have never paid taxes, they mistakenly believe this is a new burden. Operating within the GST framework helps businesses gain credibility with financial institutions.

Industry representatives pointed out that while the government’s move will streamline or regulate the segment, there is a need for greater awareness among used car dealers. “The government has been working towards regulating this sector, but the delay in awareness campaigns has led to unnecessary confusion. More efforts should be made to educate dealers on the benefits of GST compliance,” said an official of a company that is engaged in the pre-owned vehicle space.