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written by Khatabook | November 15, 2021

Know About the GST on Motor Cars and Light Motor Vehicles

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Table of Content


Before the inception of the Goods and Services Tax or GST in India, each state had indirect taxation structures. GST was introduced to get all these taxes assimilated under one tax. Below mentioned are the impact and benefits of introducing GST on Cars and Light Motor Vehicles in India. Let's know about the advantages and disadvantages along with the GST impact on car prices. 

Impact of GST on Vehicles and the Motor industry

GST effects on cars- Advantages:

  • GST implementation on the vehicle sector has a positive influence since the automobile manufacturing sector has to pay less tax, which is passed on to the customers. 
  • Before GST, various taxes such as sales tax, road tax, sector tax, Value Added Tax (VAT), motor vehicle tax, and registration duty would sum up to anywhere between 26.5 and 44%. 
  • The GST levied on cars is much lower, ranging between 0% and 28 %. This has reduced the price of vehicles, thus benefiting consumers.
  • Import vehicle dealers can celebrate as they can now reimburse the GST remunerated on goods sold or imported. This benefit was not available before as they could not reimburse the VAT and excise duty paid. 
  • Excise tax paid on units sold would be a part of Integrated GST under the GST rule. The advance amount received for the furnishing of goods is also eligible for tax as a part of GST. 
  • GST is beneficial to manufacturers in purchasing auto parts at a cheaper cost due to a refined supply chain structure under GST. 

GST effects on cars- Drawbacks:

  • GST on vehicles has affected the operational cost positively; some drawbacks have affected the dealers.
  • Whenever any vehicle is transferred, GST must be paid, and capital is locked as the supply is taxable with GST. Now, the dealer needs to pay the GST on the exact day of making advance payment. Hence, the dealers must make their dealings with a lot of caution; else it will affect their cash flow. 
  • Most automobile manufacturers provide free services/warranty cards in the form of offers during the sale of vehicles. 
  • Dealers are forced to pay the GST on these offers at the time of issuance itself. But the customers may redeem these services any time later as per their convenience and requirement.

Also Read: GST Impact on Gold & Gold Jewellery Prices

Comparison of various taxes and GST on vehicles/SUVs (in percentage):

Segment

Excise

Auto   cess

VAT

Road tax

Motor vehicle tax

Total

CGST

SGST

TOTAL

Difference

Small Cars <1200cc

12.50

1.1

14

State-based

State-based

28 (approx.)

9

9

18

10

Mid-Size Cars from 1200cc to 1500cc

24

1.1

14

State-based

State-based

39

9

9

18

21

Luxury Cars>1500cc

27

1.1

14

State-based

State-based

42

14

14

28

14

SUV’s >1500cc, >170mm ground clearance

30

1.1

14

State-based

State-based

45

14

14

28

17

GST Rates on Cars

Motor Vehicle Type

Car GST Rate

Cess

Motor vehicles used for the commutation of people not exceeding 13 in number, including the driver.

25%

15%

Motor vehicles, exclusive of emergency hospital vehicles, Autos, and vehicles with a capacity of the engine, of 1200 cubic centimetres and length of 4000 millimetres, with both internal combustion spark-ignition with an interchanging piston engine and electric motor as motors for thrust or with both compression-ignition internal combustion piston engine, diesel-or semi-diesel and electric motor as motors for propulsion.

18%

15%

Motor-driven vehicles with engine capacity not exceeding 1200 cubic centimetres and lengths not more than 4000 millimetres.

18%

1%

Motor vehicles running on diesel and with engine capacity, not more than 1500 cubic centimetres and length not exceeding 4000 millimetres.

18%

3%

Motor vehicles having an engine capacity of not more than 1500 cubic centimetres.

18%

17%

Motor vehicles having an engine capacity not more than 1500 cubic centimetres other than motor vehicles specified against entry at S. No 52B.

18%

20%

Motor vehicles of engine capacity more than 1500 cubic centimetres, majorly Sports vehicles including utility vehicles.

18%

22%

All old and used motor vehicles, electric vehicles, vehicles cleared as ambulances.

18%

0%

Temperature controlled trucks/motor vehicles 

18%

-

Special purpose motor vehicles.

18%

-

Motor vehicles transport ten or more people, inclusive of the driver, apart from buses used for public transport, which exclusively run on Biofuels.

28%

-

Motor cars and other motor vehicles mainly designed for passenger transport, apart from those mentioned above, including station wagons and racing cars, leaving out cars for physically disabled people.

28%

-

Goods transport vehicles (other than temperature-controlled trucks).

28%

-

Impact of GST on sale of used car

Before GST implementation:

VAT was applicable on the selling of used cars. However., Excise/VAT was not levied on advance received for goods supplied. Many states provided the Original Equipment Manufacturers (OEMs) or component makers with different offers or incentive schemes. The two main features of this scheme  were interest-free loans and subsidies combin ed with VAT/CST payable on sale. The sale of goods/services without any form of consideration was exempted from being taxed under VAT and Service tax. 

Importers and dealers were ineligible to claim an exemption for the VAT and excise duty paid by OEMs (Original Equipment Manufacturer). When goods were transferred from the factory, excise duty had to be paid, but no VAT/CST was applicable under pre-GST tax laws.

Post GST implementation:

The taxation area in terms of second-hand motor vehicles has seen several modifications. Initially, the same tax rate was applied on used and old vehicles sale, i.e., 28% GST as applicable and 15% of GST compensation cess applicable to commercial vehicles transporting more than 13 people. This resulted in an increase of total tax up to 43%. This led to a diminishing activity in the used motor and vehicle market due to the increased financial burden on the vehicle industry. 

As a solution to this, the Government issued a Notification explaining the reduction of GST to be levied on the old and used vehicles as follows. The cess applicable on the sale of used cars has also been exempted.

Sl. No

Types

GST rate

1

GST on car that is old and used motor vehicles running on Liquefied petroleum gases or compressed natural gas equal to or more than 1200 cubic centimetres and of the length equal to or exceeding 4000 millimetres.

18%

2

GST on old and used, diesel driven motor vehicles of engine capacity of 1500 cubic centimetres or more and the length of 4000 millimetres.

18%

3

GST on old and used motor vehicles of engine capacity more than 1500 cubic centimetres, including utility. For Example:- Sports Utility Vehicles (SUVs)

18%

4

GST on all old and used Vehicles other than those mentioned from Sl. No. 1 to No.3.

12%

The above-mentioned concessional rates would not be applicable if input tax credit under GST or Central VAT Credit under Central VAT Credit Rules or ITC under State VAT were availed.

If motor vehicles were purchased before the 1st of July 2017 and Central value-added credit was not availed, the tax rate is  65% of the average rate. The rate of GST on car lease is 6 5% of the standard rate.

How is GST on sale of used car calculated?

GST at the rates mentioned above will be evaluated based on the Margin of Supply which is to be calculated in the manner as mentioned in Notification, details of which are given below:

1. In Case Depreciation under IncomeTax Act Availed: Supply margin is the difference between Sale consideration and Written down Value, and tax has to be calculated on such margin. Under conditions where the margin of such supply is negative, it shall be:

As per Income Tax Act, income tax requires the calculation of depreciation on the asset block, but for GST, the rate must be applied for the specific motor vehicle.

2. Remaining cases: The supply margin will vary between the selling price and the purchasing price. Tax will be computed on such margin, and in circumstances where the margin of such supply is negative, it shall be ignored. A negative value in valuations need not be considered an exempt non-GST supply, and therefore, there is no need for the turn-around of ITC.

There are rules providing special valuations in persons dealing in buying and selling used vehicles. Such dealers can supply the goods as such or after minor processing, which does not change the nature of such goods. If no input tax credit has been availed on the purchase of such goods, then GST may be paid only on the differential amount between the selling price and the purchase price.

3. Sale of second-hand vehicles supplied by Government: In scenarios such as Union territory, State Government, Central Government, or a civic authority providing used vehicles, the person should register the activity under GST and, upon receiving the supply, is liable to pay tax under reverse charge.

In case of deals related to second-hand vehicles supplied by the Government to a person not registered under GST, the respective department of Union territory, Central Government, State Government, or local authority should register and pay the required car GST rate.

  • GST is highly beneficial for the people in the market buying small family cars like Alto, Datsun Go, and Nano, as a minimum cess of 1% has been charged over and above the GST rate of 18%.  
  • Bikes such as scooters and others having engine capacity in the range of 150 cubic centimetres to 180 cubic centimetres will attract 18% of GST along with 3% cess. 
  • Bikes with an engine of more than 350 cubic centimetres are popular among youths, namely Enfield 500 cubic centimetres and the popular Harley Davidson bikes. GST would be levied at a 28% rate along with an additional cess charge of 17%.
  • It is to be noted that aircraft, personal jets, and yachts come under the 3% cess bracket instead of the 15% cess, whereas GST of 28% is levied.

Car manufacturers provide many offers in terms of free warranties and services due to the cutthroat nature of the industry. These were not taxable under the previous tax laws. Post GST implementation, the free warranties and services would also be under the radar of taxation.

Should GST on car purchase be combined with warranties, accessories, and handling charges?

Vehicles are sold, including several services like extended warranty, accessories, insurance, etc. Car dealers charge for the sale of vehicles and various other ancillary services such as insurance, extended warranty, accessories, etc. 

Now, the question arises about the classification in terms of GST. Should the vehicle and the ancillary cost be treated as combined or separated under GST? The usual explanation is, it should be created as a combined supply, treating the vehicle and the main supply and the other items as a subsidiary.

In some instances, the main aim is to have the primary vehicle in good condition, and much importance is not given to the accessories. But they are still of high value and importance to the principal maintenance requirement of the vehicle overall. Thus, GST must be levied as a composite supply, including the car, accessories, and maintenance. 

Several other factors also have to be looked into while obtaining a conclusion based on different cases. Therefore, if classification is not detailed in the transaction/agreement, the consequences of valuation issues could hit this industry with large-scale litigation in the GST regime.

Also Read: Impact of GST on the Indian Economy

Conclusion

To conclude, GST effects on cars in the automobile industry has created a positive impact as the overall tax has been reduced. Further implementation of GST on vehicles has improved the automobile parts manufacturing sector due to reduced tax. The taxation calculation has been simplified by the implementation of GST on vehicle. For more information on GST, download the Khatabook app.

FAQs

Q: Has the implementation of GST reduced the Car price?

Ans:

Before the implementation of GST, excise and VAT were the two taxes charged to end consumers. The total tax used to range between 26.50% to 44%. This is higher than the GST rate, which is between 18% and 28%. Thus, car prices have been reduced for the end consumer.

Q: Can we claim the GST imposed on Cars?

Ans:

GST imposed on Cars cannot be claimed unless you are into the business of buying and selling cars.

Q: What is the GST for used Cars?

Ans:

 GST for used and old vehicles, including all kinds of motor-driven cars of engine capacity of 1200 cubic centimetres or more and a length of 4000 millimetres or more, is 18%.

Q: What is the GST rate for Electric Vehicles?

Ans:

GST levied for Electric Vehicles is 5%.

Q: What is GST levied for Motor vehicles?

Ans:

GST levied for Motor vehicles is 28%.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.