When someone buys a new car, they pay 18–28% GST. If that same car is sold to a dealer and you buy it from them, guess what? You’ll be hit with another 18% GST! This double tax feels like "do guna lagaan dena padega"!

The GST on used cars has recently been increased from 12% to 18%, and it’s clear that this change will impact the used car market negatively. For years, people have turned to used cars to save money, after all, why pay full price for a new car when someone else has already paid a hefty tax for it? But this new GST hike feels like a double slap, where the buyer and seller both lose out.

Why People Buy Used Cars

Used car buyers are usually budget-conscious. They want a good car without burning a hole in their pocket. Let’s consider an example:

Suppose a person buys a brand-new Maruti Grand Vitara for ₹16 lakhs (on-road price). Out of this, around 35–40% of the amount goes straight to the government in the form of CGST, SGST, RTO fees, and other taxes. That’s ₹5.5–6.5 lakhs in taxes alone!

Now, if this person wants to sell the car after a year or two, they’re already facing depreciation. Add the hassle of finding a buyer to the mix—most sellers either post ads online or approach a used car dealer to handle the sale.

Used car dealers typically buy vehicles from sellers, get the sale deed, and fix any issues before selling them to new buyers. Earlier, 12% GST was applied on the dealer’s profit. This allowed used car buyers to get a reasonably fair deal.

But now, with the GST rate jumping to 18%.

The Grand Vitara Example

Let’s break it down:

Selling Price: The Grand Vitara, originally bought for ₹16 lakhs, is sold to a used car dealer for ₹12 lakhs.

Dealer Expenses: The dealer spends ₹50,000 on refurbishing the car and another ₹50,000 on parking, mechanics, and operational costs.

Resale Price: The dealer aims to sell it for ₹14 lakhs, targeting a profit of ₹1 lakh.

Under the previous GST rules, the dealer would have paid 12% GST on their ₹1 lakh profit, amounting to ₹12,000. But now, with the new 18% GST, that amount increases to ₹18,000.

Do you think the dealer will absorb this cost? Of course not! This extra ₹6,000 will be passed on to the buyer, making the car more expensive.

Here’s why this hike is a problem:

Price Sensitivity: It’s a used car. Buyers are already looking for value; adding ₹18,000 in GST alone makes the deal much less appealing.

Dealer Margins: Trusted used car dealers and online platforms are organized businesses. They invest heavily in refurbishing cars, maintaining operations, and paying staff. Increasing GST squeezes their margins even further.

Chain of Intermediaries: A typical transaction involves multiple players—mechanics, parking lot owners, and sometimes even deal brokers (who take a 5% cut). With GST adding to costs, someone’s margin will inevitably be slashed—or the buyer will bear the burden.

Why This Will Hurt the Market

The used car market thrives on affordability. Increasing costs through higher taxes undermines this foundation. Buyers will hesitate to pay the inflated prices, while sellers might struggle to offload their vehicles. Dealers, caught in the middle, will have to choose between losing customers or absorbing unsustainable expenses.

While many dream of cutting out the middleman, dealing directly with sellers is no walk in the park. Online used car platforms are crawling with spam and scams, making it incredibly difficult to find a genuine seller or a buyer. It can take months of effort and follow-ups, which essentially turns into a full-time job. This is why used car dealers exist. They do the inspection, get the RTO process done and handle all the heavy lifting.

The 6% GST hike on used cars might inadvertently encourage a rise in tax evasion within the used car market.

Here's why:

When dealers operate in an organized sector, every transaction is documented—purchase invoices, refurbishing costs, and sales figures are all declared to the government. With the increased GST burden, dealers might find it tempting to underreport the transaction value to reduce their GST liability.

Dual taxation in the used car market arises because the first buyer already pays substantial taxes, including GST, road tax, and registration fees, when purchasing a new car. When the car is resold, GST is levied again, this time on the dealer’s profit margin, effectively taxing the same product twice. Unlike other industries where input tax credit offsets the cascading effect of taxes (allowing businesses to claim credit for the tax already paid on inputs), no such mechanism exists for used cars. The dealer cannot claim a credit for the taxes paid during the car's initial purchase, meaning the GST levied on resale is an entirely new financial burden but who is getting the tax again? The government!

The used car market in India, valued at approximately $23 billion and growing at a CAGR of 15%, has long operated under a framework marked by ambiguity regarding resale depreciation and tax liability. Under the earlier regime of 12% GST on margins, this uncertainty was manageable, and the market adapted to the system without major disruptions. However, with the GST rate now increased to 18%, these unresolved issues have become far more significant.

One of the key pain points remains the lack of a standardized method to account for depreciation when calculating tax. Unlike new vehicles, where taxation is straightforward, pre-owned cars present a challenge: the base value for tax computation is often left undefined, leading to discrepancies. While GST is applied only on the margin for registered dealers, the margin itself can be subject to interpretation. This becomes particularly problematic in transactions involving significant overheads such as refurbishment costs, logistics, and dealer profits, all of which add to the taxable amount.

Organized players like Maruti True Value and Mahindra First Choice are hit hardest, as they operate with complete transparency, bearing the brunt of higher compliance costs. In contrast, smaller, unorganized players may resort to underreporting margins or engaging in cash transactions, creating a dual disadvantage: reduced tax compliance and loss of competitive pricing for legitimate businesses.

The issue becomes even more complicated when considering the DAV (Depreciated Asset Value) of used vehicles and how dealers may manipulate sale prices to offset the impact of the GST hike. Much like the property sector, where sellers often report a lower value to reduce stamp duty and taxes, used car dealers may show a reduced selling price to minimize the GST burden.

Form 28 and Form 29, which are used for registration and transfer of vehicle ownership, could be manipulated in this process. By underreporting the vehicle's value on these forms, dealers could reduce the declared transaction amount, thus lowering the tax payable and maintaining competitive pricing—albeit at the cost of compliance.