GST on cars and light motor vehicles (2023)

The introduction of GST has brought a positive influence on the automotive sector. Previously, traders could not claim credit for excise duty and VAT they paid, which would further inflate the purchase cost. However, GST has eliminated the ripple effect of taxes thereby reducing the price of cars.

How has car price changed due to GST?

Previously, two main taxes were levied on car consumers: VAT and excise duties. The combined rate will be between 26.5% and 44%. Compared to this, VAT rates on cars are much lower, ranging from zero to 28%. This reduced the price of cars and benefited consumers. The price comparison of SUV, sedan and hatchback is shown below:

SUV

Silk

Hatchback

Under GST, the price of small cars or hatchbacks is reduced mainly due to lower cumulative tax rates as shown in the above calculations. In the example above, we are looking at a scenario where the manufacturer sells cars directly to consumers through their showroom.

If we consider that the manufacturer sells to a reseller and then the sale is made to the consumer, the price would drop even more. This is due to the elimination of the tax effect that existed under the old regime, i.e. Cenvat credit could not be set off against downstream VAT.

Implementation of GST and cess on cars

GST applies to almost all goods and services. This also includes cars, which includes cars. The VAT rate on cars varies from zero to 28% depending on the type and use. In addition to ICMS, the compensation rate applies to the sale of new cars.

What is the quote value for ICMS and car price calculation?

(A) Value of the offer:Under GST, the supply value is the money the seller receives from the buyer in return for the sale of the goods or services. In the case of related parties, ICMS is levied on the transaction amount. Transaction value is the amount for which unrelated parties would trade in the ordinary course of business.

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

• Selling price: Rs 6,50,000. (delivery value)
• VAT rate 18% (included in the small car category)
• GST rate at 1%
• Total Value: Rs.6,50,000 + Rs. 1,23,500 = Rs. 7,73,500

(B) Discounts in the ordinary course of trade:If a retailer deducts a discount from the selling price before or at the time of delivery and indicates this discount on the invoice, it is excluded from the value of the delivery. If such discounts are not reflected on the invoice, VAT must be paid on the invoice.

(C) Discounts after delivery:Post-delivery rebates are allowed as a deduction from the taxable amount only if the following conditions are met:

1. The discount granted must be a direct result of an agreement with customers.
2. Such an agreement must be concluded before or at the time of delivery of the goods.
3. ITC has to be reversed by the customer.
4. The discount must be linked to the corresponding supply invoice, which was originally issued by the taxable person when the goods were delivered.

(D) Insurance, registration, etc. as refunds:A reseller charges various amounts as a net dealer such as insurance, registration fees, credit card charges, etc. GST will not apply to amounts charged on a net agent basis. However, if you charge amounts greater than the actual amounts incurred, in which case VAT will be charged on them.

What is the differential tax rate applied to cars?

Hire vehicles purchased and leased before 1 July 2017 will attract GST at a rate equal to 65% of the applicable GST rate (including Compensation Levy), also at the time of sale, asNotification 37/2017 Central Tax Office.

What is the GST price with HSN code on cars?

The GST rate on cars depends on various factors such as fuel type, engine length and displacement.HSN codefor cars is covered by Chapter 87.

Based on engine capacity

ICMS for car imports

Car imports attract IGST. The amount taken into account for calculating IGST is the taxable amount + basic duty.

For example,

• Assessable value = Rs.5,00,000
• BCD = 50.000 Rs
• Amount to collect IGST = Rs.5,50,000
• IGST em 18% = 99.000 Rs

To promote 'Make in India', the government has increased customs duties on imported cars:

• Semi-Disassembled Kits for Passenger Vehicles - Increased from 15% to 30%.
• Fully Disassembled Passenger Vehicle Kits - Increased from 10% to 15%.

Customs duty is included in the IGST chargeable amount. This will also lead to an increase in IGST rate. Thus increasing the overall price of the product.

GST exemptions for cars

GST on used cars:Used car dealers pay GST on the difference between the sale price and the purchase price to eliminate the ripple effect of taxation. If the margin is negative, you don't have to pay GST. Also, the government has waived off GST on the purchase of used cars from unregistered dealerships.

The GST rate is nil for vehicles used by physically challenged persons.

Motor vehicle tax deduction

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

Let's talk about the availability of ITC on cars:

1. Employer giving car to employee for business use - Under section 17(5), clause (a) and clause (aa), ITC can be claimed on motor vehicles used for business purposes. If the car is handed over to the employee for personal use, ITC cannot be claimed.
2. ITC on demonstration cars (in showrooms) - The general rule is that ITC of motor vehicles with a capacity of less than 13 persons is excluded under the terms of section 17(5). But in the case of dealerships, the demonstration car is not purchased with the intention to sell it at retail. Therefore, it can be treated as a capital asset and claim full ITC.
3. ITC on car hire for business or transport of employees - Under section 16(1), all registered persons can claim ITC on goods or services used in carrying on or promoting business activities. In addition, ITC is available for hire/hire of motor vehicles with a capacity of more than 13 persons as amended in section 17(5). Thus, in this case, the employer can claim the ITC on the ICMS charged by the rental service provider car only if the approved capacity exceeds 13 people.
4. Transport company buying cars for passenger transport service or taxi - If a person is in passenger transport, he can claim ITC on purchase of such vehicle.

How does GST affect car prices, benefits and issues to be resolved?

Effects on car prices:General car tax rates have been reduced under VAT compared to VAT. This led to a decrease in car prices. Under GST, taxes are levied in the consuming state and not the originating state, which will boost the auto industry.

Benefits

Consumer:Car tax rates have been reduced under GST. Due to this reduction, the consumer has to pay a lower amount of tax compared to VAT.

Agents/Importers:Previously, traders and importers could not claim VAT and excise duties already paid. But with the introduction of GST, traders and importers can claim the taxes already paid.

Manufacturers:The VAT included the excise duty and thus reduced the overall construction cost. Even ITC can be claimed on the raw materials used. Thus, car manufacturers have all the benefits that allow them to reach more customers.

Issues to be resolved

Car package with accessories, warranties and handling costs:

Dealerships charge for the sale of vehicles and various other ancillary services such as insurance, extended warranties, accessories, etc. Now comes the question of classification.

Should vehicle sales charges and other incidental charges be charged separately under GST or should they be treated as 'compound commission'? The usual interpretation is that it should be treated as a composite installment as the vehicle remains the main installment and the other charges are incidental or ancillary.

For example, in the case of AMC contracts, the main objective is to keep the vehicle in working order and not to deliver the goods. Thus, although the supply of goods is of high value, it is still incidental to the main maintenance requirement. It will therefore be called a 'complex supply' of maintenance and VAT will be charged accordingly.

Several other factors must also be analyzed when drawing conclusions on a case-by-case basis. Therefore, if the classification is not clearly detailed in the transaction/agreement, the implications of valuation issues could hit this industry with large-scale litigation under the GST regime.

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