Impact of GST Registration on Cars and Automobile Industry

The introduction of the Goods and Services Tax (GST) in India was a major reform that reshaped various industries, this includes the automobile sector. Before GST, multiple indirect taxes such as excise duty, VAT, road tax, and octroi made the tax structure complex, which led to price variations across states. With GST, these taxes were consolidated, and the main aim was to bring uniformity and transparency to the system. This article helps learn the impact of GST Registration on Cars and Automobile Industry.

Impact of GST on Cars and Automobile Industry

The introduction of the Goods and Services Tax (GST) has had a major impact on India’s automobile industry, this has changed the way cars and bikes were taxed. Earlier, multiple indirect taxes like excise duty, VAT, and octroi added up to a high tax burden. Previously, the total tax burden could go as high as 44%, this made vehicle costs unpredictable. GST streamlined the system by introducing a uniform tax structure, with most vehicles now falling under the 28% tax slab.

• How GST Affects Vehicle Pricing

For many car buyers, GST has led to clearer and often lower pricing. The old tax structure was complex and varied by state, which made it difficult to know the final cost of a vehicle. Now, with a uniform GST rate and an additional compensation cess that depends on the vehicle type and pricing is more transparent.

1. Small Cars (Petrol engines up to 1200cc and Diesel engines up to 1500cc, with a length under 4000mm) attract a compensation cess ranging from 1% to 3%, this depends on the fuel type.
2. Luxury Cars & SUVs (Larger vehicles with higher engine capacity): 15% cess

• What It Means for Manufacturers and Dealers

For those in the automobile business, GST has made operations smoother. Manufacturers benefit from input tax credits, which means they can offset the tax paid on raw materials and components, this ultimately reduces the production costs. Dealers, especially those who import vehicles, can now claim tax credits that weren’t available before, making their business more profitable.

Recent Updates & Changes

Note: GST compensation cess is levied over and above the base 28% GST rate on vehicles (except EVs and some commercial vehicles).

• Encouraging the Green Mobility

To promote eco-friendly transportation, the government has rolled out incentives like the Production-Linked Incentive (PLI) Scheme. With a budget of ?26,000 crores, this scheme supports advanced automotive technology, this includes electric and hydrogen-powered vehicles. These incentives aim to attract global investments and create more opportunities for small and medium-sized businesses in the sector.

Input Tax Credit (ITC) Benefits in the Automobile Industry under GST

The Input Tax Credit (ITC) system under the Goods and Services Tax (GST) has brought significant advantages to the automobile industry, particularly for manufacturers and dealers. ITC allows businesses to offset the tax they pay on inputs such as raw materials, spare parts, and services against their output tax liability, which ultimately reduces the costs and improves the cash flow.

• ITC Benefits for Manufacturers

Before GST, manufacturers had to pay excise duty and VAT on raw materials and components used in vehicle production, but they couldn’t always claim credit for these taxes. Under GST, ITC applies to all taxable supplies, this ensures that manufacturers can claim credit for the GST paid on inputs like steel, rubber, paints, and machinery. This helps to reduce the overall cost of production and makes vehicles more competitively priced.

• ITC for Dealers and Importers

Automobile dealers and importers also benefit from ITC. Previously, they couldn’t claim a credit for excise duty or VAT paid on purchases. Now, under GST, dealers can claim ITC on GST paid at the time of vehicle purchase, service costs, and maintenance expenses. This helps lower their tax burden and improves profitability.

• Restrictions on ITC for Certain Categories

While ITC is available for most businesses in the automobile sector, it cannot be claimed on passenger vehicles purchased for personal use. ITC is allowed only for vehicles used for business purposes, such as those for transportation, leasing, or test drives at dealerships.

The ITC mechanism has streamlined the taxation process, this has reduced the cascading taxes, and enhanced efficiency in the automobile sector.

How GST Has Affected Car Prices in India

The introduction of the Goods and Services Tax (GST) has brought a major shift in how cars are taxed in India. GST has simplified the system by replacing multiple indirect taxes like excise duty, VAT, and octroi with a single tax structure, but it has also had varying effects on car prices across different segments.

• A Uniform Tax System

Before GST, car prices were influenced by a mix of taxes, which included excise duty, which ranged from 12.5% to 30%, and VAT typically between 12.5% and 14.5%, along with state-specific levies. Now, most vehicles fall under the 28% GST bracket, with an added compensation cess based on the type of vehicle and engine size. While this has made taxation more straightforward, it has also led to changes in final prices for consumers.

• How Different Car Segments Are Affected

1. Small Cars: These were previously taxed at around 29% when combined all pre-GST taxes. Under GST, petrol cars up to 1200cc and diesel cars up to 1500cc now attract 28% GST, plus a 1% to 3% compensation cess. This means their prices have remained fairly stable, with only minor fluctuations.
2. Luxury Cars & SUVs: Bigger vehicles, that included SUVs and high-end luxury cars, are now taxed at 28% GST, along with an extra compensation cess that ranges from 15% to 22%. As a result, prices for these vehicles have generally increased compared to pre-GST rates.
3. Electric Vehicles (EVs): The government has reduced GST on EVs to just 5% to promote sustainable transportation. This has significantly lowered their prices, which makes them more affordable than before.

• Effect on the Second-Hand Car Market

Initially, GST on used cars was as high as 28% that makes pre-owned vehicles more expensive. However, the rates were later revised to 12% or 18%, this depends on the engine size. It can help you bring stability to the second-hand car market. GST has simplified car taxation but affected prices differently across segments. While small and electric cars have become more affordable, luxury vehicles and SUVs have seen price hikes due to higher compensation cess charges.

GST on Electric Vehicles (EVs) in India

The Indian government continues to promote the adoption of electric vehicles (EVs) through favorable tax policies under the Goods and Services Tax (GST) framework. As of the 2024-2025 fiscal year, the GST rate on EVs remains at 5%, a significant reduction compared to the 28% GST applied to conventional internal combustion engine vehicles. This lower tax rate aims to make EVs more affordable and encourage their widespread use.

• GST on EV Chargers and Charging Stations

To support the necessary infrastructure for EVs, the GST rate on EV chargers and charging stations has also been reduced to 5%. This initiative is designed to facilitate the development of a robust charging network across the country, which addresses one of the critical challenges in EV adoption.

• GST on Lithium-Ion Batteries

While the GST on lithium-ion batteries used in EVs was previously reduced from 28% to 18%, as of January 2025, industry bodies like the India Energy Storage Alliance (IESA) have advocated for a further reduction to 5% to align with the tax rate on EVs and their chargers. Such a move could potentially lower the overall cost of EVs, which makes them more accessible to consumers.

• Customs Duty on Lithium Imports

In addition to GST adjustments, the Union Budget 2024-2025 announced a complete removal of customs duty on the import of lithium minerals. This policy is intended to reduce input costs for domestic lithium-ion battery manufacturers. This policy aims to lower the production costs for domestic lithium-ion battery manufacturers, boost the local EV industry, and reduce dependency on battery imports. These combined tax incentives and policy measures reflect the government's commitment to foster a sustainable and self-reliant EV ecosystem in India.

How GST Affects Dealers & Importers

The introduction of GST has brought major changes for automobile dealers and importers in India. GST has made taxation more straightforward as it has replaced multiple taxes like excise duty, VAT, and octroi. Anyway, it has also introduced new compliance requirements that businesses need to follow.

• Better Tax Benefits for Dealers

Before GST, the car dealers couldn’t claim back the excise duty and VAT they paid on vehicles, which added to their costs. Now, with the Input Tax Credit (ITC) under GST, they can get a refund on the tax paid during the procurement. This helps reduce their overall expenses, improve cash flow, and offer better prices to customers.

• Easier Stock Transfers

Earlier, when dealers transferred vehicles between different states, they had to pay excise duty and VAT, which increased costs. Under GST, such transfers are taxed under the Integrated GST (IGST), but the amount can be claimed as a tax credit. This change has made stock movement smoother and eliminated unnecessary extra taxes.

• Higher Costs for Importers

For automobile importers, GST has replaced multiple customs duties like Countervailing Duty (CVD) and Special Additional Duty (SAD) with a single IGST. While this simplifies taxation, imported luxury cars and SUVs still face a high overall tax burden due to additional compensation cess charges, which makes them more expensive for buyers. GST has made life easier for dealers as it has reduced costs and improved cash flow, but importers still face challenges due to high taxes on luxury vehicles.

We have discussed the topic of impact of GST on Cars & Automobile Industry, and how GST has transformed the automobile industry, this makes taxation simpler, reduces costs, and improves business efficiency. Manufacturers and dealers now enjoy input tax credits and streamlined logistics processes. It faces challenges like high taxes on luxury cars and compliance burdens. On the brighter side, government incentives for electric vehicles (EVs) are paving the way for a greener future. As the industry evolves, businesses must stay informed about tax regulations to stay competitive. Whether you’re a car manufacturer, dealer, or importer, you have to adapt to these changes is key to success in this dynamic market.

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