Mumbai: Big Boy Toyz, a Gurugram-based firm that specializes in selling used super luxury cars such as Lamborghinis, Ferraris and Bentleys, has put its expansion on hold because of a goods and services tax (GST) structure that treats pre-owned cars on par with new ones.
Big Boy Toyz, along with other firms in the organized used car market, such as Maruti True Value, Mahindra FirstChoice Wheels Ltd and Tata Motors Ltd, have made individual and group representations to the GST Council to revisit the tax structure.
Under GST, used cars are taxed at 28% or 43% on gross margin depending on the fuel type and engine size, as is the case with new cars. That compares to 5% on gross margins in each state or 2% of sales value reference before GST was implemented starting 1 July.
The new tax structure has hit Big Boy Toyz the most as all its models fall under the highest tax bracket of 43% (28% tax plus 15% cess).
“We were on the verge of opening stores in Mumbai and Hyderabad but have put the plans on hold as the new tax structure makes the business unviable," said founder and managing director Jatin Ahuja.
Maruti Suzuki India Ltd, parent of Maruti True Value, declined to comment. An email sent to Tata Motors on Friday remained unanswered.
The higher taxation, firms said in a letter to revenue secretary Hasmukh Adhia, is a setback for the 3.3 million used car market valued at Rs85,000 crore—which is larger than the new car industry—and will prompt buyers to go to unorganized outlets, which do not come under the GST net. Only 12% of the transactions in the used car market take place through branded outlets but, cumulatively, they are expanding 25% every year, dealer association body Federation of Automobile Dealers Association (Fada) wrote in a 17 August letter to Adhia.
Mint has reviewed the letters sent by the companies and by the dealer lobby group.
“The higher tax will impact the selling price of the used car. Therefore, those who are looking to replace their car are likely to postpone their new car buying decision," said Abdul Majeed, auto practice leader at PwC. This will impede growth of used cars as well as new cars, he added.
The used car firms are trying to highlight that if the intention of the GST Council was to be revenue neutral in terms of tax collected before and after implementation of GST, the effective tax rate should be around 10-12%—instead of anywhere between 29% (including 1% cess) and 43%, said Nagendra Palli, chief executive of Mahindra FirstChoice.
Big Boy Toyz’s business has been expanding at a fast clip over the past six years —from Rs6 crore in 2010 to Rs200 crore in 2016 and was forecast to touch Rs1,000 crore by 2020. But with GST, it has hit a road bump and the 2020 target may remain unmet.
The average tax rate on the models Ahuja sells has shot up to 43% from 5% in the pre-GST era. Even if used cars do not attract the 15% cess like the new ones, as has been agreed to by the Council, the business is still unviable, Ahuja said.