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GST on Motor Cars and Light Motor Vehicles

Updated on:  

08 min read

Introduction of GST has brought an affirmative influence on the automobile sector. Earlier, the dealers could not claim credit of excise duty and VAT paid, which would further inflate the purchase cost. But, GST has eliminated the cascading effect of taxes, thereby reducing the price of the automobiles.

How did the price of car change due to GST?

Previously, two major taxes were charged to the consumers of cars which were VAT and excise duty. The combined rate would range anywhere between 26.5% and 44%. As compared to this, the GST rates on cars are much lower ranging between Nil and 28%. This has reduced the price of cars and benefited consumers. Price comparison of SUVs, sedans and hatchbacks is shown below:

SUV

ParticularsPre- GST (Rs)Post- GST (Rs)
Cost of manufacturing10,00,00010,00,000
Excise duty at 30%3,00,000
Production cost13,00,00010,00,000
Transportation, etc.10,00010,000
Sales charge25,00025,000
Base amount for tax calculation13,35,00010,35,000
VAT at 14%/ GST at 28%1,86,9002,89,800
Cess at 15%1,55,250
Price15,21,90014,45,050

Sedan

ParticularsPre- GST (Rs)Post- GST (Rs)
Cost of manufacturing8,00,0008,00,000
Excise duty at 27%2,16,000
Production cost10,16,0008,00,000
Transportation etc.10,00010,000
Sales charge25,00025,000
Base amount for tax calculation10,51,0008,35,000
VAT at 14%/ GST at 28%1,47,1402,33,800
Cess at 15%1,25,250
Price11,98,14011,94,050

Hatchback

ParticularsPre- GST (Rs)Post- GST (Rs)
Cost of manufacturing5,00,0005,00,000
Excise duty at 12.5%62,500
Production cost5,62,5005,00,000
Transportation etc.10,00010,000
Sales charge25,00025,000
Base amount for tax calculation5,97,5005,35,000
VAT at 14%/ GST at 18%83,65096,300
Cess at 1%5,350
Price6,81,1506,36,650

Under GST, the price of small cars or hatchbacks reduces primarily due to the cumulative lower tax rates as shown in the above calculations. In the above example, we have considered a scenario where the manufacturer is directly selling the cars to consumers through his showroom.

If we consider that the manufacturer sells it to a dealer and thereafter the sale takes place to the consumer, price would further reduce. It is due to the removal of the tax-on-tax effect that existed in the erstwhile regime, i.e., Cenvat credit could not be offset from output VAT.

Applicability of GST and cess on cars

GST applies to almost all goods and services. This includes automobiles too, which includes cars. GST rate on cars varies from Nil to 28% depending upon its type and its use. Apart from GST, compensation cess applies to the sale of new cars.

What is the value of supply to compute GST and cess on cars?

(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.

For example, Mr A buys Hyundai Grand i10 for Rs.6.5 lakh from a dealer and accessories. Then, GST and cess are calculated as follows:

  • Sale price: Rs.6,50,000 (value of supply)
  • GST rate at 18% (comes under the category of small cars)
  • GST cess at 1%
  • Total value: Rs.6,50,000 + Rs.1,23,500 = Rs.7,73,500

(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.

What is the differential tax rate applicable to cars?

Leasing of vehicles purchased and leased before 1st July 2017, would attract GST at a rate equal to 65% of the applicable GST rate (including Compensation Cess), also at the time of sale as per Notification 37/2017 Central tax.

What is the GST rate with HSN code on cars?

The GST rate on cars depends on several factors such as fuel type, length and engine capacity. HSN code for cars is covered under Chapter 87.

Based on engine capacity

CategoryModelHSN CodeGST rateCompensation cess
LPG or CNG vehicles with engine capacity not exceeding 1200cc and length not exceeding 4000mmVolkswagen Polo, Hyundai Grand i10, Maruti Suzuki Swift, etc.870318%1%
Diesel vehicles with engine capacity not exceeding 1500cc and length not exceeding 4000mmHonda Amaze, Nissan Kicks, Maruti Baleno870318%3%
Engine capacity greater than 1500ccLamborghini Aventador, Bugatti Chiron,  Toyota Land Cruiser870328%17%
SUVs (Engine capacity greater than 1500cc)Renault Duster, Mahindra TUV, Jeep Compass, Maruti Vitara 870328%22%
Electric vehiclesMahindra eVerito and Mahindra e20. Electric vehicles owners receive a direct deduction of 7.5%87035%Nil

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 under GST for cars

GST on used cars: Dealers of used cars pay GST on the difference between the selling and the buying price to eliminate the cascading effect of taxation. In case the margin is negative, then there is no need to pay GST. Also, the government has exempted GST on the purchase of used cars from unregistered dealers.

The GST rate is Nil on vehicles used by physically disabled persons.

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.

How does GST impact car prices, its benefits, issues to be resolved?

Impact on car prices: The overall tax rates on cars have reduced under GST compared to VAT. This has led to a reduction in prices of cars. Under GST taxes are charged on the consumption state rather than the original state which will boost the automobile sector.

Benefits

Consumer: The tax rates on automobiles have reduced under GST. Due to this reduction, a consumer has to pay a lower tax amount as compared to VAT.

Dealers/Importers: Earlier the dealers and importers couldn’t claim VAT and excise duty already paid. But, with the introduction of GST dealers and importers can claim the taxes already paid.

Manufacturers: GST has subsumed excise duty and thus reduced the overall cost of manufacturing. Even ITC can be claimed on raw materials used. Thus, car manufacturers are getting all the benefits which enable them to reach out to more customers.

Issues to be resolved

Bundling of the car with accessories, warranties and handling charges:

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.

Whether the charges for the sale of a vehicle and other ancillary costs should be charged under GST separately or should it be treated as a ‘composite supply’? Normal interpretation is that it should be treated as a composite supply as the vehicle remains the principal supply, and other charges are being incidental or ancillary.

For example, in the case of AMC contracts, the main aim is to keep the vehicle in the running condition and not supply the goods. Thus, even though the supply of goods is of high value, they are still incidental to the principle requirement of maintenance. Therefore, it will be termed a ‘composite supply’ of maintenance, and GST would be levied accordingly.

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

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