GST Council Increases Tax Rate On Small Used Cars To 18%

The GST Council has decided to increase the tax rate on small used cars, including electric vehicles, from 12% to 18%. This change affects vehicles with engines up to 1200 cc when sold by registered dealers. The GST is applied to the profit margin made by the dealer during the sale.

Impact on Used Car Market

This adjustment aligns with the council's broader policy of standardising tax rates for used vehicles. Previously, cars with engine capacities over 1200 cc were taxed at 18%, while those below were taxed at 12%. Now, both categories face the same tax rate as larger cars and SUVs.

The used car market has seen significant growth recently. In 2023-24, over 5 million units were sold compared to around 3 million in 2026-27. Certified pre-owned programs from companies like Maruti Suzuki and Mahindra & Mahindra, along with online platforms like Spinny and Cars24, have contributed to this growth.

Challenges for Registered Dealers

The new GST rate will affect registered dealers significantly. Many used car sales still occur through unorganised sellers who are not registered. The increased tax could widen the price gap between organised and unorganised sellers, impacting competition.

Previously, old cars faced a GST of 28% plus an additional cess of 1-15%. In 2018, the council reduced this to a range of 12-18% and removed the cess. This latest change continues efforts to streamline taxation in the used car sector.

Effects on New Car Sales

Original equipment manufacturers have noted that the booming used car market is affecting entry-level car sales. These smaller cars have struggled post-pandemic as they were once key growth drivers for new passenger vehicles.

With rising prices for new entry-level cars in recent years, consumers are paying more for desired features and sizes. Consequently, many are opting for pre-owned vehicles as a cost-effective alternative. Some manufacturers report that used cars now sell for Rs 4.5-5 lakh on average, directly competing with new entry-level models.

As these changes unfold, both buyers and sellers in India's automotive market will need to adapt to evolving economic conditions and consumer preferences.