Tax reform worries India’s used-car dealers
in Automotive
In India, a fresh Goods and Services Tax (GST) will go into effect on July one in what will be the country’s fattest tax reform in the past two decades.
Auto dealers of used cars are apprehensive that the Indian government’s decision to substitute all existing indirect taxes at the state and union level with a steep, single tax (GST) may erode their profit margins. Unclear about the actual influence of GST on their industry, they are rushing to clear their stock before the fresh tax regime takes effect.
To allay dealers’ fears, revenue secretary Hasmukh Adhia gave his assurance that c-to-c trade of used cars won’t be treated as a taxable transaction under GST. The tax will apply only to registered, third-party auto vendors.
Close to two million used cars switch palms each year – about the same number as fresh cars sold in the country – making it a $11 billion U.S. market, according to the Society of Indian Automotive Manufacturers (SIAM). In the past few years, the used-car market has grown at dual the tempo of the new-car business – from a reported 1.6 million units (worth $6 billion U.S.) in two thousand eleven to toughly Three.Trio million units ($15 billion U.S.).
With GST, these numbers are likely to switch. The rate of GST will be the same for second-hand car transactions as for fresh cars, namely twenty nine percent for petite cars and forty three percent for all other cars.
“This is steep compared to today’s tax laws,” said Umesh Hora, the chief financial officer at Jaipur-based GirnarSoft, holder of auto classifieds, such as Cardekho, Gaadi, and Zigwheels.
“Typically, dealers of pre-owned cars operate at a gross margin of ten to twelve percent – much higher than the two to three percent on new-car sales – but this has to cover their cost of rental, promotion, and refurbishment,” he explained. The current rates will affect dealers’ margins and they are likely to pass this cost to their customers,” he said.
Dhruv Chopra, chief marketing officer at CarTrade.com, told us: “Since dealers can factor in GST only on their margin and not on the utter transaction value, and given the high rates, it seems logical that procurement prices will drop to reduce the influence of GST, since selling prices are dictated by the market and fluctuate within a stationary range.”
Therefore, one way or the other, the cargo of tax will fall back on the person selling his car to a dealer. However, according to Dhruv, dealers may get hit in another way. It will now be far more attractive to sell a car directly to the end party rather than through a dealer. “This will be the case not just with used cars, but also with new-car sales, as a massive part of the new-car request is driven by the ‘exchange’ route,” he explained.
Auto sites are helping dealers meet the fresh challenges of their business by developing innovative solutions, around GST. In any case, classifieds operators expect the influence of GST to be brief lived. “In the long run, we expect GST to bring more transparency and promote more organized set-ups in used-car sales,” said Hora.
Also, as long as the value proposition of dealers (in terms of warranties and other support services) remains strong, classifieds don’t expect the market share of dealers to erode compared to direct c-to-c transactions.
Current taxes levied on auto transactions
Table shows different types and rate of taxes levied on passenger vehicles/SUVs in India