Players may not be able to increase prices for fear of losing customers
High GST rates on used cars have hit margins of organised players in the business.
GST does not discriminate between new and used cars as the rates are the same. So pre-owned car dealers in the organised trade have to pay 28-43 per cent on their gross margins under the GST system as against five per cent VAT previously.
“If you buy a car for ₹1 lakh and sell it for ₹ 1.10 lakh, we used to pay ₹500 out of the ₹10,000 earlier. Now under the GST, we have to pay anywhere between ₹2,800 and ₹4,300 depending on the car classification,” points out K Mahalingam, Partner, T S Mahalingam & Sons, a leading player in the pre-owned car space.
The first outcome of high GST rates could be an increase in prices of used cars as dealers would try to pass on the additional cost to buyers. But it needs to be seen whether the dealers would be able to do that given the presence of numerous unorganised players and growing e-commerce sites.
Dealers are more likely to lower the purchasing price of the cars to balance the tax increase. But the seller would have to bear the additional cost. So, either the buyer or the seller may suffer.
Organised players fear that the situation would lead to turning away the buyers of pre-owned cars from organised players to unorganised trade.
“ Buyers are not convinced about the prices after GST introduction. They say they get better prices with unorganised players. The higher GST rates will definitely push the buyers away from organised players,” says a senior official at Maruti’s True Value.
“The more people move into informal trade, higher the revenue loss for the government,” feels Mahalingam.
“I don’t think government would want to charge 28-43 per cent on margins. I hope there will be a clarification soon,” he said.
This industry has been getting increasingly organised in recent years. But higher GST rates come as a dampener.