The GST Council's recent proposal to increase the Goods and Services Tax (GST) rate on used vehicles from 12% to 18% has sparked concerns about its potential impact on India's formal used car market. The revised rate, applicable to vehicles sold through registered dealers and online marketplaces, is expected to shift a significant portion of used car transactions to informal channels, undermining the growth of the organized sector.
Growing Reliance on Informal Channels
According to a LocalCircles survey, which gathered over 23,000 responses from consumers across 288 districts, nearly 42% of used car transactions currently occur outside formal platforms. This percentage is expected to rise if the proposed GST hike is implemented, with informal networks becoming increasingly attractive to buyers and sellers aiming to avoid higher tax rates.
While the 12% GST rate will still apply to individual transactions, the higher 18% rate will target vehicles sold with a margin or those purchased by businesses claiming depreciation. This differentiation could unintentionally incentivize consumers to bypass formal channels in favor of less regulated, informal networks.
Impact on India's Used Car Market
India's used car market, valued at $32.44 billion, has been growing at an unprecedented rate, driven by increasing consumer preference for personal mobility and the emergence of technology-driven platforms offering financing and trade-in options. The market is expected to surpass $73 billion by FY28, as per the Indian Blue Book report by car & bike and Das Welt Auto.
The demand for pre-owned luxury cars has surged by 35-40% annually, with metro and Tier-1 cities dominating this segment. Online platforms and local dealers have extended the market's reach to Tier-2 cities and beyond, with dealers like Big Boy Toyz reporting that over 33% of inquiries for luxury vehicles now come from non-metro regions.
However, the LocalCircles survey highlights a strong preference for offline methods. Approximately 57% of respondents relied on their social networks or traditional dealerships for transactions, while only 30% used online platforms. Trust remains a significant barrier for online marketplaces, with 27% of respondents expressing reluctance to use these platforms for high-value transactions.
Challenges for Online Marketplaces
Distrust, combined with a preference for established offline networks, has stunted the growth of online platforms. Survey respondents cited reasons such as trust issues (27%), preference for dealership trade-ins (17%), reliance on personal connections (13%), and a desire to avoid taxable transactions (5%) as key factors for avoiding online marketplaces.
This indicates a clear need for online platforms to enhance consumer confidence through robust buyer-seller verification processes, transparent pricing, and post-sale support.
Potential Ramifications of the GST Rate Hike
The proposed GST rate hike could deepen the challenges faced by the formal used car market. With informal channels already dominating the sector, the increase in GST may drive more consumers to opt for untaxed, unregulated transactions, undermining efforts by startups and organized dealerships to expand their market share.
To mitigate these risks, stakeholders are urging policymakers to reconsider the proposed GST rate hike or introduce measures to protect the formal market's growth trajectory.
Survey Demographics
The LocalCircles survey covered 23,000 respondents across 288 districts in India, with 65% male and 35% female participants. The responses came from Tier-1 (45%), Tier-2 (23%), and rural districts (32%), providing a comprehensive view of consumer behavior in the used car market.
The GST Council's final decision will determine the path forward, but industry stakeholders warn that any move discouraging formal transactions could have long-term implications for India's rapidly growing used car market.
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