GST on Hybrid Cars: Rates, Market Impact and Tax Differences

Pure battery EVs are the best solution for emission-free mobility. However, these are expensive. Internal combustion engine-driven cars are cheaper to own but are becoming expensive to operate and cause air pollution. Hybrid cars can strike a fine balance between costs and emissions, but they attract GST rates similar to ICE cars. It makes them equally out of reach for the mass market. 

In this article, we discuss GST on hybrid cars and how currently applicable GST rates affect hybrid car sales in India. 

What is a Hybrid Car?

Theoretically, a hybrid car is a type of automobile that is capable of using a combination of multiple propulsion systems to drive the car. For example, a typical hybrid car uses ICE along with an electric motor. The IC engine can run on petrol, diesel, biofuel, LPG or CNG while the electric motor runs on a battery. Besides, hybrids also use regenerative braking to convert lost energy during braking into electricity and store the same in the battery. 

Depending on the type and hybridisation, a hybrid vehicle can run only on ICE or electricity or a combination of ICE and an electric motor. Internal combustion engines and electric motors both have their pros and cons. Hybrids blend both propulsion technologies to achieve higher operational efficiency, improving fuel efficiency and reducing tailpipe emissions, as compared to ICE-powered vehicles.

Types of Hybrid Cars:

Based on the degree of hybridisation, we can broadly segregate hybrid cars into the following categories: 

1. Parallel Hybrid: Both the ICE engine and electric motor can power the car. Usually, the electric motor drives the car while starting up and in signal-to-signal traffic. Once the car achieves a certain speed, the ICE engine works to provide extra torque and power. 
2. Series Hybrid: Electric motor works as the sole propulsion system, like battery EVs. The IC engine is used to generate electricity and charge the battery, which then powers the electric motor. 
3. Plug-in Hybrid (PHEV): It is similar to parallel hybrids with larger capacity batteries, chargeable with external power sources.

Benefits of hybridisation of a car’s propulsion system:

• It reduces tailpipe emission significantly compared to purely ICE driven cars. 
• Balanced use of the electric motor and IC engine helps achieve high operational efficiency. 
• Hybrid car owners do not experience range anxiety. 
• These cars are cheaper to operate compared to ICE cars. 
• Compared to pure EVs, hybrids are cheaper to manufacture. 

Understanding GST on Automobiles 

The two major aspects of GST are that it is applicable to the supply of goods and services and that any business as a recipient of goods or services supplied can claim ITC. As per the GST rules, a ‘supply of goods’ involves selling, exchanging, transferring, bartering, leasing, renting, licensing, or disposing of any goods or services. So, dealers and importers of automobiles can now claim tax credits on GST paid. 

GST has streamlined the indirect taxation structure for manufacturers by replacing multiple taxes, like excise duty (VAT), central sales tax (CST), octroi, and state-specific levies. Earlier, some states also offered investment-linked tax incentives to automobile OEMs, further complicating the implications of indirect taxes on manufactured cars. With GST, the taxation system has become much more transparent. 

The introduction of GST has a positive impact on the sale of used cars. Currently, a registered dealer must pay 12% to 18% tax on the sale of used cars based on vehicle configuration, which is much lower than pre-GST tax rates on the sale of used cars. So, the profit margin for used car dealers has improved. GST has improved transparency and helped in price discovery for selling to registered buyers. 

 Additionally,  compensation cess applies to some categories of automobiles. The Government introduced this cess on sin and luxury goods to recover losses states have suffered because of the GST tax regime.  

GST Rates on Hybrid Cars in India 

Before FY2018, hybrid cars were equivalent to pure battery EVs regarding applicable GST rates. However, in 2018, to promote faster adoption of EVs, the government raised the GST slab on hybrids with IC engines. 

Currently, motor vehicles with hybrid power trains of petrol ICE and electric motor attract 28% of GST along with a 15% compensation cess. This makes the total applicable tax rate on these vehicles 43%, which is similar to the tax rate applicable to midsize luxury sedans with lengths over 4 meters, but ICE engine capacity is less than 1500 cc.  

Automobile industry experts expected tax cuts for hybrid cars at the 54th GST Council meeting. However, no decision was made on the GST cut for hybrids during the council meeting.

GST and Cess applicable to personal vehicles like cars and SUVs:

Tax Differences Between EVs and Hybrid Cars

There is a stark difference between GST and compensation cess applicable to battery EVs and motor vehicles with hybrid power trains. For example, a Tata Curvv EV attracts a total GST of only 5%, and a Maruti Suzuki Grand Vitara Intelligent Hybrid attracts a total tax burden of 43%.  

Impact of GST on the Hybrid Car Market 

Hybrid cars attract a high blanket tax rate of 43% (including cess) irrespective of their passenger carrying capacity, vehicle size and engine capacity. Despite much less tailpipe emission and higher fuel efficiencies, hybrids are ranked among the highly polluting large diesel sedans and SUVs. Such taxation policy is adversely affecting the adoption of vehicles with hybrid power trains in India, with grave implications for the automobile industry and the pro-environment movements.   

The effects of such an adverse taxation policy are: 

• Dwindling buyers’ interests - Despite lower ex-showroom prices, high GST is making hybrids much more expensive compared to EVs and many luxury ICE cars. It is demotivating buyers to purchase environment-friendly hybrids. 
• Manufacturers’ disinterest in introducing hybrids - With no clear positive direction toward taxation policy on hybrids, car manufacturers are showing a lack of interest and plans to introduce hybrid cars. 
• Slower adoption of low-emission automobile technologies - Hybrids are less polluting compared to, even, the mid and small segment cars. EVs are expensive. In such a situation, the lack of buyers’ and manufacturers’ interest in hybrid cars because of high tax rates is making achieving automobile emission targets difficult. 

Will Hybrid Vehicles Receive an Incentive Boost? 

The transport minister of India, Mr Nitin Gadkari, formally requested the finance ministry to reduce GST on hybrids to 12%, and the government of Uttar Pradesh has already declared zero road tax for hybrid vehicles. So, there was a lot of buzz around initiatives to reduce GST rates on hybrid vehicles and the industry experts were expecting decisions on the same in the 54th GST Council meeting. 

However, no decision was taken in the 54th meeting regarding the reduction of GST rates on hybrid cars. Besides, the council has extended the time to March 2026 for the collection of compensation cess. So, currently, we cannot see any possibility of tax incentives for faster adoption of hybrid vehicles.