Mumbai: Seven out of every 10 cars sold in the used car market are priced under Rs4 lakh. This is in contrast to the buying behaviour of new car buyers, who have been graduating to more expensive models; eight out of every 10 new cars sold cost under Rs8 lakh. Owing to the low ticket size, only 15% of the pre-owned car buyers opt for credit, according to a study done by Indian BlueBook, a pricing and analytics platform for new and pre-owned vehicles in India. The study, now in its second year, leverages the used car footprint “on the ground" via Mahindra First Choice Wheels Ltd’s franchise network.

The study also highlights the impact of demonetisation and implementation of the goods and services tax (GST) on a segment that has been growing rapidly year on year. The used car market grew 9% in the year that ended in March. It would have expanded at a faster pace, selling 0.2 million more cars had it not been for the cash crunch created by the note ban, which took effect in November,the study said.

The highly fragmented pre-owned car market is divided into four categories—the organized, semi-organized, unorganized and consumer-to-consumer market. While the organized category accounts for 15% of the total market, the semi-organized market accounts for 6% of all used car sales in the country. The unorganized market has a 17% share and the consumer-to-consumer market 32%.

Nagendra Palle, chief executive at Mahindra First Choice, the branded used car business of the Mahindra group, said the relatively low percentage of finance is an indication of the nascent nature of the market.

“In more mature markets like the US, close to 65% of the buyers opt for finance," he said. Palle attributed the low finance penetration in India to the higher interest rates loans for used cars carry—11% to 13% as compared to 7%-9% for the new cars.

Under GST, tax rates for organized dealers of used cars in 70% of the states have gone up sharply. With the dealers likely to pass on the increase to customers, the residual value of the cars sold would drop and used car prices will go up. While it has boosted consumer-to-consumer transactions, it has impeded growth of the organized used car market, which is in its early stage of development.

Tax rates on used cars, under GST, can go up to 50% (28% GST plus a cess of up to 22%) on the gross margin, depending on the fuel type and engine size, as is the case with new cars. That compares with 5% on gross margins in each state or 2% of sales value reference before GST was implemented starting 1 July.

Branded used car firms including Mahindra First Choice and Maruti True Value have been lobbying for a reduction in taxation on used cars, Msint reported on 29 August.

PTI contributed to this story.