Why VAT prevents car dealers from capturing the used car market

Within a month and a half, the Russian Automobile Dealers Association (RoAD) plans to send appeals to the Bank of Russia, the Ministry of Finance and the Ministry of Industry and Trade with a request to abolish double taxation that occurs when selling used cars between legal entities. Alexey Podshchekoldin, vice-president of ROAD and chairman of the board of directors of BN-motors, told Vedomosti about this. He also presented at a meeting of the Council of RoAD on February 18 a presentation on the impact of VAT collection from legal entities on the used car market (Vedomosti has a presentation).

According to Podshchekoldin, the working group of the RoAD will prepare a scientific and economic justification for the need for amendments to the Tax Code (TC) to apply to the departments. A representative of the association confirmed this information. The analytical agency Avtostat will act as the statistics provider. “We are going to connect the RSPP (Russian Union of Industrialists and Entrepreneurs). We look forward to their support too. I think that in a month and a half we will prepare the documents and in April we will apply, ”said the source of Vedomosti.

“If they contact us, we’ll discuss it,” the head of the RSPP, Alexander Shokhin, briefly answered the question of Vedomosti. A spokesman for the Ministry of Industry and Trade declined to comment. The Ministry of Finance and the Central Bank did not answer the questions of Vedomosti.

Taxation when buying and selling cars is as follows: the primary VAT is already included in the cost of a new car sold for the first time. If the buyer is an individual, then when selling a car after some time to a car dealer (for example, under the trade-in scheme), VAT is not paid. This norm was established by amendments to the Tax Code from April 1, 2009.

If a dealer-legal entity resells this car to another individual, then VAT is paid only on its mark-up, which usually amounts to up to 10%. But when he sells the car to another legal entity – for example, to another dealer – then VAT is charged in the amount of the full cost of the car. In this case, the legal entity can only claim VAT from its margin for deduction. This is a secondary taxation for the same car, which is proposed to be abolished.

Now, when a dealer buys a used car from another legal entity, he adds at least 20% when selling the car just to get the cost of the purchase. Taking into account the trade margin, the final price of the resold car is 20–30% higher than the average market price. This slows down the development of the used car market, and transactions between legal entities are carried out in a minimal amount, says Podshchekoldin.

According to him, so far the main category of sellers in the used car market is individuals (about 80%). “We could buy more from legal entities. For example, today a three-year-old Lada Granta in Moscow costs at least 20,000–30,000 rubles. cheaper than in Bryansk (BN-motors is a Bryansk company). I would love to buy cars from Major or Rolf, but I can’t,” notes Podshchekoldin.

At the end of 2021, a total of 6.5 million cars were sold on the secondary market in Russia, which is 25% more than in 2020, follows from the presentation of Podshchekoldin. The share of official sales through car dealers in this market was 15%, or 975,500 units, against 14.6% (778,500 vehicles) a year earlier. In 2009, when double VAT was abolished on the purchase of used cars by a legal entity from individuals, the share of dealers in a market of 3.5 million units was less than 2%.

The capacity of the secondary market in monetary terms for 2021 doubled to 5.79 trillion rubles. Of these, 868 billion rubles. accounted for sales through official dealers (also doubled), the remaining 4.92 trillion rubles. (85% of the market) – in the so-called gray zone, which is essentially not taxed, the presentation notes.

According to Podshchekoldin, the abolition of double taxation will increase sales of used cars through dealers to 50% of the total market. It will also triple the potential VAT collection from official sales of used cars – from 15.8 billion in 2021 to 53 billion rubles, follows from the presentation.

RoAD in 2019 already lobbied for such changes in taxation, but then the Ministry of Finance did not support the idea. The agency noted that the abolition of double VAT would lead to losses in federal budget revenues and would de facto be a subsidy for VAT taxpayers who resell cars, RIA Novosti wrote. Even earlier, in 2018, the relevant amendments to the Tax Code were proposed by the Ministry of Industry and Trade.

The General Director of Avtostat, Sergey Tselikov, confirmed the appeal of the RoAD for help in preparing materials for regulators. In his opinion, the share of dealer sales in the secondary market has not yet reached 20%, but tends to this figure. “Attempts towards the abolition of double VAT” in sales of used cars between legal entities have been going on for years, he recalls. And they must be continued, because it is double taxation that is the stumbling block for the growth of the share of official sales in the segment, Tselikov said.

If this attempt succeeds, it will be great, Vladimir Popov, founder of the Favorit Motors dealer network, told Vedomosti. Such a decision will be useful for the car market, as it will increase the turnover rate of used cars, says Nikolai Baskakov, director of the used cars division of Avilon Group of Companies. It can also be expected that after the elimination of double VAT, dealers will be able to increase their share of used car sales over the next three years, he notes. But big numbers should not be expected, Baskakov believes, sales growth can be about 1-2%.

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