Proposed GST rate cuts on automobiles to end classification disputes, hatchbacks may attract 18% tax against 28% now

In the upcoming sweeping reforms, the tax rates on automobiles in India will be restructured. This will resolve the classification disputes related to the engine capacity and vehicle size, which have been playing crucial roles in defining the tax rates for vehicles in the country. Automobiles are currently in the highest tax bracket of the GST regime, and with this move, the government aims to benefit the common people.

Presently, automobiles in India are taxed at 28 per cent, which is the highest GST slab. Additionally, a compensation cess, ranging between one per cent and 22 per cent, is levied on top of this rate, depending on the type of vehicle. This further adds burden on the buyers. The total tax incidence on cars, depending on engine capacity and size of the vehicle, ranges from 29 per cent for small petrol cars to 50 per cent for SUVs. Electric vehicles are taxed at a 5 per cent rate. The tax rate has been a concern for consumers as well as the automakers.

News agency PTI has reported that as per the central government’s proposal for moving the GST system to a two-tier rate structure of five and 18 per cent and a 40 per cent slab for a select few items, automobiles will be placed in a slab to put an end to disputes arising due to the classification of cars by engine capacity and length. A lower GST rate of 18 per cent, as compared to the current 28 per cent, is expected to boost demand and sales of the cars, as the vehicles will become more affordable. The small cars that have traditionally been the driving force of the Indian passenger vehicle market are expected to see a boost with this GST reform. The report claims that this will eventually boost consumption, a key idea behind the GST overhaul proposal mooted by the Centre.

The Centre's proposal, which includes doing away with the 12 and 28 per cent slab, will be discussed by the Group of Ministers (GoM) on GST rate rationalisation on August 21. Thereafter, the GST Council, comprising the Centre and state finance ministers, will likely meet next month and approve the final GST rate structure.

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