Can We Claim GST on Car: Navigating the Maze of GST

The enigmatic world of Goods and Services Tax (GST) in India, especially concerning car purchases, is akin to navigating a complex labyrinth. Let’s demystify this intricate web and address the burning question: Can we claim GST on car purchases in India?

GST and Car Purchases – An Overview

Ever since the implementation of GST in India, there has been a flurry of questions regarding its implications on various sectors, particularly the automobile industry. The GST regime, introduced on July 1, 2017, streamlined the tax structure by subsuming multiple taxes into a single framework. This transformation significantly impacted car prices and the associated tax credits.

Understanding GST Rates on Cars

Ever since the implementation of GST in India, there has been a flurry of questions regarding its implications on various sectors, particularly the automobile industry. The GST regime, introduced on July 1, 2017, streamlined the tax structure by subsuming multiple taxes into a single framework. This transformation significantly impacted car prices and the associated tax credits.

Impact on Consumers and the Automobile Industry

The GST regime brought a sigh of relief to consumers as it lowered the overall tax burden on car purchases. Before GST, customers paid a combined rate of excise and VAT, averaging between 26.5% and 44%. This rate dropped from 18% to 28% post-GST, allowing for significant savings. 

Manufacturers also benefit from reduced manufacturing costs and improved supply chain mechanisms under the GST umbrella. Dealers and importers, previously unable to claim input tax credit (ITC) under the old system, now enjoy this advantage, enhancing their financial flexibility.

Can We Claim GST on Car Purchase?

Here’s where it gets a bit complex. Generally, under Section 17(5) of the CGST Act, the GST levied on cars cannot be reimbursed, and motor vehicles are not eligible for Input Tax Credit. 

However, there are exceptions. Companies engaged in certain businesses, such as transportation services, may be eligible for ITC on GST charged for employee transportation, depending on the government’s specific conditions.

GST and Second-Hand Cars: The Margin Scheme

The GST Margin Scheme for second-hand cars is a crucial aspect of India’s GST framework, offering a tax-efficient solution for used car dealers. Under this scheme, GST is levied not on the full selling price of the vehicle but rather on the profit margin – the difference between the purchase and selling price. This approach effectively prevents double taxation, a concern before GST. 

Importantly, no GST is charged on the transaction if a dealer sells a car without making any profit (i.e., there’s no margin). This scheme is particularly beneficial for those dealing in used cars, as it reduces the overall tax burden, making the trade of second-hand vehicles more financially viable​.

Advantages of Buying a Car in a Company’s Name

Purchasing a car in a company’s name in India offers several GST advantages. Key benefits include:

  • Input Tax Credit (ITC): Companies can claim ITC for the GST paid on car purchases. This credit can be offset against the GST payable on the company’s sales, reducing overall tax liability​.
  • GST Refunds: If the car provides taxable services, companies can claim GST refunds, which benefits businesses involved in transportation or logistics​.
  • Leasing and Renting: GST paid on leased or rented cars can be claimed as a business expense, allowing for ITC claims or GST refunds, depending on the business’s nature​.
  • Depreciation Benefits: Under the Income Tax Act, companies can claim depreciation on cars used for business purposes, reducing taxable income and tax liability​.
  • Flexibility in Transfer and Sale: Cars purchased in a company’s name offer ease in transferring or selling the vehicle, potentially benefiting from reduced or exempted GST rates on such transfers​​.

These benefits are subject to the type of company, its business activities, and compliance with GST rules and regulations. Consulting a tax advisor is recommended for tailored advice.

Frequently Asked Questions:

Can I claim GST on a personal car purchase?

Generally, no. GST on personal car purchases is not eligible for Input Tax Credit, except under specific business-related conditions.

How does GST impact second-hand car sales?

Under the GST margin scheme, second-hand car dealers pay tax only on the profit margin, reducing the tax burden significantly.

Are there any GST benefits for companies buying cars?

Yes, companies can claim Input Tax Credit on the GST paid on car purchases, along with depreciation and other tax benefits.

Conclusion: Is Now a Good Time to Invest in a Car?

With the dynamic nature of GST rates and their impact on various segments, it’s crucial to assess the current market trends. While prices for mid-segment and small diesel cars might rise, luxury cars and SUVs could offer more attractive pricing. The decision to invest in a car now should be weighed against these changing factors and the potential GST benefits.