Increased GST On Used Cars Likely To Push Transactions To Informal Channels

Updated: Tuesday, December 24, 2024, 12:17 [IST]

The decision by the GST Council to hike the tax rate on old and used vehicles from 12% to 18% has sparked concerns over its potential impact on the formal and online marketplaces for such trades. This move, as revealed by a survey from LocalCircle, could significantly affect the sales dynamics in the pre-owned vehicle sector. According to the survey, a large portion of used vehicle transactions currently bypasses formal channels, and this trend is likely to increase due to the new tax policy.

Impact on Consumer Behavior

The survey highlighted that a significant 42% of used car buyers and sellers prefer informal channels for their transactions. This preference is anticipated to grow following the GST Council's latest tax adjustment. The rise in GST is applicable to the margin value—the difference between the vehicle's purchase and sale price—handled by resale platforms such as Cars24 and Carwale. This development could shift consumer behavior even further towards non-official transaction methods.

Alternatives to Formal Channels

Despite the adjustments in GST rates for used vehicles, direct transactions between individuals will remain taxed at the lower rate of 12%. Interestingly, only a small fraction, about 10%, of used car transactions occur through online classified platforms like OLX Auto.

The survey found that a considerable number of transactions, 30%, occur within close social circles. Additionally, 25% of participants preferred trading in their vehicles at a dealership for a new one, indicating a varied approach to buying and selling used cars among consumers.

Trust Issues with Marketplaces

One of the significant barriers to the growth of online and formal channels in the used car market is the lack of consumer trust. The survey indicated that many consumers hesitate to engage with online marketplaces or dealerships due to the substantial financial stakes involved in these transactions. This mistrust further compels buyers and sellers to seek alternative methods that feel more secure, even if they fall outside the formal market structure.

Growth of the Pre-Owned Vehicle Sector

Despite these challenges, the future of India's organised used car market looks promising, with projections suggesting it could surge to $73 billion by the financial year 2028 from its current value of $32.44 billion. This growth is underpinned by the increasing demand for pre-owned luxury cars, which has been climbing at an annual rate of 35-40%. This demand spike is driven by luxury car owners who frequently upgrade to newer models, facilitating a vibrant market for high-end used vehicles.

Demand for used cars is not limited to metropolitan areas; it is expanding into tier-1 and tier-2 cities as well, driven by the broadening network of local dealers and online platforms. This expansion is a testament to the growing acceptance and interest in pre-owned vehicles across different parts of the country.

Survey Insights

The insights from the LocaCircle survey, which garnered responses from over 23,000 participants across 288 districts in India, shed light on the geographical distribution of the used car market's clientele. Approximately 45% of respondents were from tier-1 cities, while 23% hailed from tier-2 areas. The remaining 32% of participants were from tier-3, 4, 5, and rural regions, highlighting the widespread appeal and reliance on used vehicle transactions across various demographics.

The findings from this comprehensive survey underscore the complexities and evolving dynamics of India's used car market in the face of regulatory changes. It reflects consumer preferences, concerns, and the shifting landscape of the trade in pre-owned vehicles, with implications for both buyers and sellers navigating the formal and informal sectors.