Indian car companies have to comply with various taxation laws when it comes to the sale of new vehicles in India. In India, one can save taxes when making a purchase of a new vehicle. In this article, we will be discussing how one can save taxes on the purchase of a new car in the Indian market.
How much GST one have to pay for the car on the basis of length and its engine size?
A GST of 28% is applicable as per the CGST Act, 2023, on all the petrol cars and diesel cars sold in India. A 3% compensation fee would be applicable to diesel cars with a 1500-cc engine capacity and a length of less than 4 meters. If the length of the diesel car is more than 4 meters and the engine size is less than 1500 cc, then the compensation would be 20% on that car. The compensation rate would further increase to 22% if the length is more than 4 meters, the engine capacity is greater than 1500 cc, and the ground clearance is above 170 mm.
In the case of petrol, LPG, and CNG cars, a compensation cess would apply up to 1% to the engine capacity less than 1200 cc and the length less than 4 meters. If the length is more than 4 meters, then 15% of the compensation would be applicable. A compensation cess of 22% applies in the case where the engine capacity of petrol, CNG, or LPG cars is more than 1200 cc, irrespective of the length of the car.
Tax Laws for Buyers in India
The Income Tax Act, 1961, has listed certain provisions under which one can make a purchase of a new car. Under Section 80C of the Income Tax Act, 1961, one can claim a deduction of up to Rs 1.5 lakhs from the total income that’s earned before the taxes. This deduction can only be claimed by individuals and Hindu undivided families. Companies, partnership firms, and LLPs are not eligible for this benefit. Another thing one should keep in mind is that a car purchased for personal use is not eligible for this benefit because it’s a luxury item in India. Additionally, one can also claim the tax benefit on the car insurance if the vehicle is being utilized for business purposes.
Under Section 80EEB of the Income Tax Act, 1961, one can claim benefits on the purchase of a new electric vehicle without paying road tax. The maximum benefit one can claim is only up to Rs 1.5 lakhs. The GST rate is also reduced to just 5% on the purchase of a new electric vehicle in India. One must be aware of the eligibility criteria, which are as follows:
- Only an individual can benefit from this deduction of the Income Tax Act, 1961.
- The loan must only be utilized for the purchase of electric vehicles.
- The loan should have been sanctioned between April 1 and March 31, 2023.
One can also opt for the input tax credit under Section 16-Section 21 of the CGST Act, 2023, which will be helpful while saving tax on a new car. However, there is an exemption under Section 17(5) of the CGST Act, 2023, that one cannot claim a tax benefit for vehicles with a seating capacity of less than 13 people. One can escape from this exemption in the following cases:
- If one is teaching how to drive a car to other people, then that person can escape the exemption under Section 17(5) of the CGST Act, 2023.
- Suppose a car is used for the transportation of the employees. Then again, one can escape the exemption of Section 17(5) of the CGST Act, 2023.
- A car that a dealership purchases for the purpose of making a sale to its customers.
- The vehicle used for transporting the goods will also be eligible for the ITC claims.
Let’s take the example of a person paying the GST on the Toyota Fortuner, which is Rs 12 lakhs. Then one can claim the input tax benefit on the GST that’s paid on the Toyota Fortuner used for transportation. If the input tax benefit is Rs 5.72 lakhs for the Toyota Fortuner, then the output cost to be paid is Rs 7.28 lakhs. Additionally, one can also claim the tax collected at source if the tax is being paid in advance by the taxpayer. After claiming the TCS on the financial transactions, one can have a reduction in the tax liability. This can be done after the taxpayer files an ITR for his financial transactions. Furthermore, the amount of depreciation can also be claimed, after which there would be a reduction in the cost of the car. This would be possible if the taxpayer belongs to the category of paying 42% of the tax.
In conclusion, there are provisions where one can claim tax benefits on the purchase of new vehicles; however, the savings on GST are only available in the case of vehicles used for business purposes.
Abhiraj Singh ( Legal intern)