Understanding Goods and Services Tax on Vehicles in India: Rates, Calculation, and Exemptions

The Goods and Services Tax (GST) significantly influences vehicle prices in India, with different rates applying to various car segments like small, large, and hybrid models. This tax system replaced previous duties such as excise duty and VAT, eliminating the cascading effect of taxes. Recent amendments from the 56th GST Council meeting on September 3, 2025, have reshaped the automotive tax landscape. These changes, notified by notification 09/2025-CTR on September 17, 2025, aim to reduce costs for smaller vehicles while increasing taxes on luxury cars and larger hybrids. This article details the impact of GST on car prices in 2025, outlining the latest rate adjustments and their consequences for consumers.

What is Goods and Services Tax on Vehicles?

Under current GST legislation, automobiles fall within the definition of "supply" and are subject to tax, with specific exceptions. Vehicles designed for individuals with physical disabilities are exempt from GST. Additionally, acquiring pre-owned vehicles from dealers not registered under GST falls outside the scope of taxation. GST has streamlined the tax framework for cars in India. For instance, small petrol cars with engines up to 1200cc historically faced a 28% GST along with an additional 1% cess. However, more substantial luxury vehicles incurred higher rates. This standardized tax system aims to offer buyers more predictable costs compared to the pre-GST era.

Goods and Services Tax Rates on Automobiles in India

The following table outlines the updated GST rates for various vehicle types, effective from September 22, 2025. These revisions, recommended by the GST Council, will be formally enacted through official government notifications.

Consider this example for a petrol car under 1200cc with a length below 4000mm:

Determining the Value of Supply for Calculating GST and Cess on Cars

Let’s use an example where a compact petrol car has a pre-tax cost of INR 5,00,000.

1. GST Calculation: The government applies an 18% tax on this amount.
   • 18% of INR 5,00,000 equals INR 90,000.
2. Total Price:
   • INR 5,00,000 plus INR 90,000 results in INR 5,90,000.

This calculation method can be adapted for other vehicle types by applying the appropriate GST rate for that specific category.

Value of Supply Components

(A) Definition of Value of Supply: Under the GST framework, the value of supply represents the amount a seller receives from a buyer for goods or services. In transactions involving related parties, GST is levied based on the transaction value, which is the price at which unrelated parties would typically trade.

(B) Discounts in Regular Trade Practices: If a dealer offers a price reduction through discounts either before or at the time of supply, and this discount is clearly reflected on the invoice, it is excluded from the value of supply. However, if such discounts are not documented on the invoice, then GST must still be remitted on the original amount.

(C) Post-Supply Discounts: Discounts provided after the supply can only be deducted from the taxable value if certain criteria are met:

• The discount must stem directly from an existing agreement with the customer.
• This agreement should have been established either before or concurrently with the supply of goods.
• The customer must reverse any Input Tax Credit (ITC) previously claimed on the discounted portion.
• The discount must be directly attributable to the original supply invoice issued by the taxable person.

(D) Reimbursement for Insurance and Registration: When a dealer collects charges for services such as insurance, registration fees, or credit card processing fees purely as an agent, these amounts are not subject to GST. However, if the dealer collects sums exceeding the actual costs incurred, GST will be applied to the excess amount.

Goods and Services Tax on Imported Vehicles

The import of cars is subject to Integrated Goods and Services Tax (IGST). The calculation of IGST is based on the assessable value plus the basic customs duty.

For instance:

• Assessable value = INR 5,00,000
• Basic Customs Duty (BCD) = INR 50,000
• Value for IGST calculation = INR 5,50,000
• IGST at 18% = INR 99,000

To support the ‘Make in India’ initiative, the government has increased customs duties on imported vehicles:

• Semi-knocked down (SKD) kits for passenger vehicles: Increased from 15% to 30%.
• Completely knocked down (CKD) kits for passenger vehicles: Increased from 10% to 15%.

The customs duty is included in the base value for IGST computation. This increment will consequently raise the IGST amount, leading to an overall increase in the final price of the imported product.

GST Rate Exemptions for Automobiles

The Indian government provides specific GST concessions on four vehicle types, aiming to promote affordability, accessibility, and environmental sustainability.

1. Electric Vehicles (EVs): These vehicles are subject to a low 5% GST rate, encouraging the adoption of green transportation.
2. Ambulances: A GST rate of 18% applies to ambulances, contributing to reduced costs for healthcare providers.
3. Used Cars: GST is levied solely on the profit margin of the dealer, not the vehicle's full sale price. If a used car is sold at a loss, no tax applies, making pre-owned vehicles more economically viable.
4. Vehicles for Persons with Disabilities: Specially designed vehicles for individuals with disabilities receive GST discounts, enhancing mobility and independence.

Input Tax Credit for Motor Vehicles

Section 17(5) of the GST law outlines blocked credits, which restrict the availability of ITC for certain motor vehicles. Specifically, ITC cannot be claimed on motor vehicles used for passenger transport with a seating capacity of 13 persons or less (including the driver). However, ITC is permissible when vehicles serve the following purposes:

Availability of Input Tax Credit on Cars

1. Employer-Provided Cars for Business Use: As per Section 17(5), clauses (a) and (aa), ITC can be claimed on motor vehicles utilized for business activities. If the vehicle is provided for an employee's personal use, ITC cannot be claimed.

2. ITC on Showroom Demo Cars: Generally, ITC for motor vehicles with a seating capacity under 13 persons is blocked under Section 17(5). However, for car dealers, demo cars are not acquired for retail sale. They are treated as capital assets, allowing for the claim of full ITC.

3. ITC on Renting Cars for Business or Employee Transport: According to Section 16(1), all registered individuals can claim ITC on goods or services used for business operations or furtherance. Additionally, ITC is available for leasing or renting motor vehicles with a seating capacity greater than 13 persons, as per the amended Section 17(5). Therefore, an employer can claim ITC on GST charged by a service provider for renting motor vehicles only if the approved seating capacity exceeds 13 persons.

4. Transport Businesses Purchasing Cars for Passenger Services or Cabs: Businesses involved in passenger transportation can claim ITC on the purchase of such vehicles.

GST Savings on Popular Car Models

The recent GST adjustments offer varying benefits across different car brands and models. The following tables illustrate the approximate GST savings on popular cars:

Tata Cars: GST Benefit List

Maruti Cars: GST Benefit List

Hyundai Cars: GST Benefit List

Mahindra Cars: GST Benefit List