GST on Cars in India 2025: New Rates, Calculation, Impact and Exemptions

GST (Goods and Services Tax) is a tax that adds significantly to the price of cars, but not all cars have the same rate. Small cars, big cars, and hybrids are taxed differently. Earlier, excise duty and VAT inflated costs, but GST removed this cascading effect. In the 56th GST Council meeting (3rd September 2025), important changes were introduced for the automobile sector, making small cars more affordable while luxury and larger hybrids became costlier. These changes were notified by notification 09/2025-CTR dated 17th September 2025.

In this blog, you’ll learn how GST impacts car prices in 2025, the latest rate changes, and their effect on buyers.

Key Takeaways

The recent 56th GST Council meeting introduced the following key updates with changes effective from 22nd September 2025:

• Petrol & Petrol Hybrid, LPG, CNG Cars (≤1200cc & ≤4000mm) GST rate reduced from 28% to 18%.
• Diesel & Diesel Hybrid Cars (≤1500cc & ≤4000mm) GST rate reduced from 28% to 18%.
• Luxury Cars & Larger Hybrids (beyond small-car thresholds) GST rate increased from 28% to 40%.
• The imported cars attract IGST (calculated on the assessable value and basic customs duty), which increases the cost of imported vehicles.

What is GST on Cars?

Cars are covered in the scope of supply as defined by the GST law without any exemption. However, vehicles used by physically disabled persons are exempted from GST. Furthermore, the purchase of used cars from unregistered dealers is out of the scope of taxation. 

GST has simplified taxation on cars in India. If you’re buying a small petrol car under 1200cc, you’re looking at a 28% GST with just a 1% extra charge, or cess. Larger, luxury cars get a higher rate, making GST a key player in shaping car prices. This streamlined tax introduced by the GST law unlike earlier tax regime, helps keep costs predictable, often giving buyers a break compared to pre-GST days.

GST Rate on Cars in India

Let's consider an example of petrol car below 1200cc with length under 4000mm

Note: The new GST rates are effective from September 22, 2025. These changes are indeed subject to notification, as they were recommended by the GST Council and will be formally implemented through official government notifications.

What is the Value of Supply to Compute GST and Cess on Cars?

Let’s say a small petrol car costs INR 5,00,000 (before tax).

1. GST Tax: The government adds 18% tax on it.
   
   
   • 18% of INR 5,00,000 = INR 90,000.
2. Final Price:
   
   
   • INR 5,00,000 + INR 90,000 = INR 5,90,000.

This same process works for other car categories; just adjust the GST rate as needed based on your car type.

(A) Value of supply: Under GST, the value of supply is the money that the seller collects from the buyer in exchange for the sale of goods or services. In the case of related parties, GST is charged on transaction value. Transaction value is the value at which unrelated parties would transact in the normal course of business.

(B) Discounts in normal trade practice: If a dealer provides deduction in the sale price by way of discounts before or at the time of supply and shows such discount in the invoice, it is excluded from the value of supply. If such discounts are not reflected in the invoice, then GST must be paid on the same.

(C) Post supply discounts: Post supply discounts are allowed as a deduction from taxable value only if the following conditions are met:

1. Discount provided should be a direct consequence of an agreement with the customers.
2. Such an agreement should be executed either before or at the time of supply of goods.
3. ITC should be reversed by the customer.
4. The discount should be linked to the relevant supply invoice, which was initially issued by the taxable person at the supply of goods.

(D) Insurance, registration etc. as reimbursements: A dealer collects various amounts as a pure agent such as insurance, registration charges, credit card swiping charges etc. GST will not apply on amounts collected as a pure agent. But, if he collects amounts over and above the actual amounts incurred then in that case, GST would be charged on the same.

GST on Import of Cars

Import of cars attracts IGST. The value considered for calculating IGST is the assessable value + basic customs duty.

For example,

• Assessable value= Rs.5,00,000
• BCD= Rs.50,000
• Value for charging IGST= Rs.5,50,000
• IGST at 18%= Rs.99,000

To promote ‘Make in India’, the government has increased customs duty on imported cars:

• Semi knocked down kits of passenger vehicles- Increased to 30% from 15%.
• Completely knocked down kits of passenger vehicles- Increased to 15% from 10%.

Customs duty is included in the value for charging IGST. This will lead to an increase in IGST amount as well. Thereby increasing the overall price of the product.

Exemptions of GST Rates on Car

Indian government offers special GST concessions on four types of vehicles to promote affordability, accessibility, and sustainability.

1. Electric Vehicles (EVs) – In this section only 5% GST is applicable. The intention is to promote green mobility.
2. Ambulances – 18% GST, reducing costs for hospitals
3. Used Cars – GST applies only on the profit margin, not the full price. No tax applies if sold at a loss, making pre-owned cars more cost-effective.
4. Vehicles for Persons with Disabilities – GST discounts lower prices for specially designed vehicles, ensuring better mobility and independence.

Input Tax Credit on Motor Vehicles

Section 17(5) talks about blocked credit and thereby disallows ITC on certain motor vehicles. ITC is not available on motor vehicles used for transport of persons with a seating capacity of less than or equal to 13 persons including the driver. ITC is available when vehicles are used for below purposes:

Lets elaborate on the availability of ITC on cars:

1. Employer giving the car to the employee for business use- As per section 17(5), clause (a) and clause (aa), ITC can be claimed on motor vehicles used for business purposes. If the car is given to the employee for personal use, then ITC cannot be claimed.
2. ITC on demo cars (at showrooms)- The general rule is that the ITC of motor vehicles with a seating capacity less than 13 persons are blocked as per section 17(5). But, in the case of car dealers, the demo car is not purchased with an intention for retail sale. So, it can be treated as a capital asset, and full ITC can be claimed.
3. ITC on renting of cars for business or employee transport- As per section 16(1), all registered persons can claim ITC on goods or services used in the course or furtherance of business. Also, ITC is available on leasing/renting of motor vehicles with seating capacity more than 13 persons as per amended section 17(5). Thus, in this case, an employer can claim ITC on GST charged by the service provider to rent motor vehicles only if the approved seating capacity is greater than 13 persons.
4. Transport business purchasing cars for passenger transport service or cabs- If a person is in the transportation of passengers, he can claim ITC on such vehicle purchase.

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