All about GST on Motor Cars and Light Motor Vehicles

GST (Goods and Services Tax) is a tax the government that significantly adds to the price of cars. But here’s the catch—not all cars have the same GST! Small cars, big cars, electric cars—each one has a different tax rate.

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. The GST rate varies based on the car type, engine capacity, and fuel variant. In this blog, you’ll learn how GST impacts car prices in 2025.

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.

Here's an overview of GST rates for different car categories in India:

As you can see, small cars have a lower overall tax rate (29-31%), while mid-sized, luxury cars, and SUVs have higher rates (43-50%) due to increased cess. Electric vehicles stand out with the lowest rate at only 5%.

Pre-GST vs Post-GST Car Price Comparison in India

Consider a petrol car sold in 2016 versus the same car sold in 2017-

Note: The total tax burden and final price are similar for both pre-GST and post-GST, assuming the base price remains constant. Yet, it was higher in the pre-GST regime due to state-levied taxes.

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 28% tax on it.
   
   
   • 28% of INR 5,00,000 = INR 1,40,000.
2. Extra Cess: Another 1% tax is added.
   
   
   • 1% of INR 5,00,000 = INR 5,000.
3. Final Price:
   
   
   • INR 5,00,000 + INR 1,40,000 + INR 5,000 = INR 6,45,000.

This same process works for other car categories; just adjust the GST rate and cess 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.

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.

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 28%= Rs.1,54,000

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 – 12% 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.

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.