written by Khatabook | September 13, 2021

Impact Of GST On Car Prices And Other Automobiles In India

In India, the automobile industry has a significant market for bikes and cars because of its large population. The slightest changes in the Goods and Services Tax or GST affect automobiles' final price, therefore, affecting anyone who wants to purchase a vehicle. With the implementation of GST, which is a single tax, the GST impact on the automobile industry has been positive. Automobile dealers can now claim the Cess and Value Added Tax or VAT paid as Input Tax Credits or ITC as its benefits. Thus, the final price of cars has been reduced in the new tax regime. And one can even see luxury cars becoming common on the roads because of this. Electric vehicles also have received a large subsidy providing the impetus for the growth of the sector. 

Effect of GST on automobile industry

Implementation of GST has helped the growth of the automobile sector. In the pre-GST regime, there were working capital blockages due to added regulation. The cascading tax effect and the requirement of large amounts of credit affected the automobile industry significantly. However, the tax reduction in GST on cars has positively influenced this industry. 

Over the last year and a half, the automobile industry has seen the short-term demand fall, moving away from luxury items, including cars, because of the COVID-19. There is lower manufacturing output, exiting unprofitable markets, unsold idle inventories and reduction of the total GST from the automobile segment. The FY 2020-21 has been challenging, and some experts expect a tax rate rationalisation or waiver to help boost one of the largest contributors of GST to the government soon. So, let's understand the factors influencing the automobile industry in the pre-GST and post GST and evaluate the GST impact on car price.

The Pre-GST Impact on Automobile Industry:

Here’s how the pre-GST impact on car prices can be explained: 

  • Under the pre-GST regime, the 2 main tax components were interest-free loans and subsidies. The Central Sales Tax or CST/Value Added Tax or VAT were levied on a sale. Hence, goods or services on credit were tax-exempt from service and VAT taxes. Additionally, used car sales were taxed under VAT and State taxes that could be a composite rate. The VAT/ Excise taxes were not applicable on goods supply and advances received for supplies. Many of the Indian states offered investment-linked incentive schemes to their Original Equipment Manufacturers or OEMs. 
  • Dealers and importers of cars were ineligible for the OEM excise duty and Countervailing duty or CVD. Whenever goods were transferred to the dealers from the factory, excise duty was payable though no CST/ VAT was charged.
  • Several vehicles were exempt from auto-cess/National Calamity Contingent Duty or NCCD like the 3-wheel vehicles, electrically operated vehicles, hydrogen or fuel cell technology vehicles, taxis, ambulances, vehicles of physically disabled persons etc. 

Thus, other than losing out on the accumulated GST amounts, the pre-GST taxation structure was very high, i.e., the tax had to be paid at every stage of the production until sold to the customer. So the customer had to pay tax on the already paid tax. This lead to customer dissatisfaction, a burden on the manufacturers, dealers and OEMs. The post-GST tax structure is very rational and is well-categorised to bring more used-car dealers and car parts dealers into the taxpayers net while providing an overall lower GST taxation structure.  

Advantages of the GST structure:

  1. Rationalisation and reduction of taxes: 

The effect of GST on car price is determined by Integrated Goods and Services Tax or IGST, State Goods and Services Tax or SGST and Central Goods and Services Tax or CGST. These taxes replaced the Central Sales Tax or CST and VAT on 1st July 2017. 

With respect to interstate sales, credit couldn’t be claimed to pay the output VAT. This issue was resolved with the GST Act, which provides for Input Tax Credit or ITC on the inter-state sale of services and goods. This led to a considerable cost saving and the elimination of CST. Even ITCs on rent, promotion, advertisement, etc., can be claimed to lead to the operating costs rationalisation. Take a look at the pre and post GST rates to check these facts.

The rates and types of taxes on taxes on SUVs and passenger cars are as below:

Sector

Excise %

*Nccd   auto   cess %

VAT%

*Road tax %

*MV tax%

Total%

CGST%

SGST%

Total%

Difference%

Small Cars with engine

<1200cc

12.5

1.1

14

Based on State 

Based on State 

28

9

9

18

-10

Midsize Cars engine

1200- 1500cc

24

1.1

14

Based on State

Based on State

39

9

9

18

-21

Luxury Cars larger than 1500cc

27

1.1

14

Based on State

Based on State

42

14

14

28

-14

SUV’s >1500cc, ground clearance>170mm

30

1.1

14

Based on State

Based on State

45

14

14

28

-17

Electric Vehicles

5.4

1.1

14

   

20.5

6

6

12

-7.5

Also Read: Impact of GST Rate on Furniture Manufacturers

Reduction in tax rates: Cars are now divided into 5 GST categories as given below.

  • Small Cars: GST on cars like the Tata Tiago, Hyundai Grand i10, Volkswagen Polo, Maruti Suzuki Swift, etc., is 18% which is a 10% lower rate compared to the 28% tax in the pre-GST era.
  • Mid-size Cars: GST rates on mid-sized cars like the Maruti Baleno, Honda Amaze, Tata Nexon etc., were reduced from 39% to 18%.
  • Luxury Cars: Luxury cars have a tax deduction of 14% on the Lamborghini Aventador, Bugatti Chiron, Toyota Land Cruiser, Land Rover etc. and are taxed at just 28% GST.
  • SUVs: SUVs like the Jeep Compass, Renault Duster, Maruti Vitara, Mahindra TUV, Brezza etc., have a car GST rate of 28% with a whopping 17% reduction in the GST rates.
  • Electric Vehicles: These have a 7.5 % GST deduction from the previous 20.5% to a small 12%.
  1. The Cess Rates:

Over and above the GST rates, owners of cars must also pay Cess rates as below:

Segment

Engine Capacity

GST

Cess

Small cars

1200cc and lesser

18%

1%

Mid-size cars

1,200 -1,500cc

18%

3%

Large cars

1,500cc and greater

28%

17%

SUVs

1500cc and greater

28%

22%

Electric Cars

5%

Nil

  1. Automobile parts segment: The previous tax regime charged the excise duty on accessories, automobile parts, and manufacturer’s of components over and above on the maximum retail price or MRP value minus abatement. This made the portion of duty paid on the total value greater than the transaction value. Thus, spares and automobile parts were more expensive. Post GST rates on cars have been significantly reduced.
  2. Transactional value subsidy: The GST laws provide transaction value to exclude the subsidy of the State and Central governments. Hence, electric vehicle manufacturers can now save tax on cars and enjoy huge subsidies. The GST laws include a clear interpretation of this subsidy.
  3. Second-hand vehicles: The automobile sector is also rationalised as the GST laws enable tax payment on the difference of purchase and selling prices. Thus unclaimed ITC is provided on the purchase price, i.e., the supplier can re-claim the amount of ITC which was earlier reversed due to any discrepancy. This has made the largely unorganised and highly taxed sector move to the organised sector.
  4. Single tax across the nation: Now, differences in the State based taxes are a thing of the past. The “One Tax, One Nation” policy has reduced tax evasion and rationalised the functioning of car showrooms and delivery points.
  5. Consumer burden reduction: The previous average combined rate of taxes charged on cars and bikes was between 26.50% to 44%. This was higher as compared to the present GST which is now reduced to 18% and 28% leading to effective tax reductions to the end-users. 

GST for Cars:

The Post-GST regime has rationalised the taxes in the automobile segment, causing a huge effect of GST on the automobile industry, which has been briefly summarised below:

Motor vehicle description

GST Rate

Cess

Transport Motor vehicles carrying a maximum of 13 persons, including the driver.

28%

15%

Motor vehicles, excluding three-wheelers, ambulances, vehicles with less than 1200cc engine capacity and length 4000 mm, having reciprocating piston engines, spark-ignition IC engines and electric motor propulsion or CID engines with electric motor propulsion.

28%

15%

Petrol, CNG, LPG vehicles with 1200cc engine capacity and 4000mm length.

28%

1%

Diesel vehicles with 1500cc engine capacity and 4000mm in length.

28%

3%

Motor vehicles with 1500 cc engine capacity.

18%

17%

Motor vehicles with 1500cc engine capacity other than the S. No 52B specified motor vehicles.

18%

20%

SUVs with 1500 cc engine capacity and other utility vehicles.

18%

22%

Used and old vehicles, ambulances and electric vehicles.

18%

Nil

Refrigerated motor vehicles. 

18%

Nil

Special purpose vehicles.

18%

Nil

Bio-fuel Motor vehicles for 10 or more including the driver, excluding public transport buses.

28%

Nil

Passenger-transport cars and vehicles for passenger transport, racing cars, station wagons etc., excluding physically handicapped person cars.

28%

Nil

Non-refrigerated goods transport vehicles.

28%

Nil

Disadvantages of GST on automobiles: 

There are certain disadvantages of the GST rate on cars as well, such as. They are:

Warranties and Vouchers: These block the working capital as the GST charged on warranties and vouchers for after-sales service issued to the customer remains blocked till redemption. 

Discounts: The automotive industry is famous for seasonal discounts and post-sales dealer discounts as promotional schemes. Such discounts were not linked to the invoice value hence, creates issues in taxation. Discounts will now not be included in the supply value provided they agree before or at the time of supply. 

Insurance and Ancillary services: A major point of litigation is the lack of directives on the trend of manufacturers and automobile dealers under the GST regime, charging amounts for accessories, insurance, and other ancillary services. These are confusing when there are differential rates of taxes for mixed supplies and composite supplies.

Cess: The cess levied is relatively high and has the effect of negating GST taxes in the automobile segment.

Also Read: Impact of GST on Different Sectors

Conclusion:

The rates and GST effects on cars are customer-friendly for the end-users using small cars like the Datsun Go, Santro etc., as they charge a low 1% Cess above the reduced 18% GST. Scooters and bikes with engine capacity between 150 to 180cc now have 18% GST plus a 3% Cess. The heavier bikes with 350 to 500 cc capacity like the Enfield 500CC and Harley Davidson now have a GST rate of 28% plus 17% Cess. Luxury and large vehicles like aircraft, personal jets, yachts etc., will be charged 28% GST and 15% Cess. Along with these, warranties and complimentary services are now taxable. 

The importance of GST compliance and the expanding network of automobile parts dealers, used-car dealers, etc., have stressed the importance of maintaining accounts and GST compliance. Khatabook is a useful app for all merchants and business owners who wish to simplify the process of maintaining accounts. We hope through this article, we have been able to convey the effect of GST on automobile industry

FAQs

1. Has the GST rate been cut for cars and automobiles?

Yes. The effective GST impact on car price for small and mid-size cars has been reduced to 18% from 28 and 39%. Luxury cars also have benefited with a GST of 28% versus the previous tax rates of 42% and 45%. The electric vehicles GST rate has been cut from 20.5 % to 12%! Thus the automobile and car segment and have got a huge boost with GST rates.

2. Has the GST rate been cut for automobile parts?

The GST effect on cars based on their categories post-GST is: 

Car Segment

Capacity of Engine 

Post-GST Tax rate

Small cars 

Less than 1,200cc

18%

Mid-size cars

1,200cc to 1,500cc

18%

Luxury cars

1,500cc and greater

28%

SUVs

1,500cc and greater

28%

Electric vehicles

NA

12%

3. Is the GST paid on cars refundable?

Generally no. The GST paid on the purchase of an automobile is refundable as a credit only to car dealers in the travel business and those who buy and sell cars or automobiles.

4. Is GST added and calculated on the MRP?

The MRP or maximum retail price is the maximum price that includes the GST charged and calculated on any product. Cars, therefore, when sold in India, cannot exceed the MRP. If any retailer is charging and calculating the GST on the MRP, then the buyer should raise a complaint against the dealer with the GST authorities.

5. What is the formula to calculate the GST?

The GST formula is best calculated as 

GST Amount = (GST rate into Original Cost) divided by 100 of the Net Price.

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