The introduction of the Goods and Service Tax (GST) on the 1st of July, 2017, marked a significant turn in the financial sector of India, ultimately revamping the existing tax structure. Many industries, including the automobile industry, experienced noticeable changes under GST, particularly in the context of vehicle loans. Before the introduction of GST, different tax rates were levied in different states for the same product or service. The GST acted as a one-stop solution for negating indirect, and often inconsistent taxes imposed by the central and state governments. This article explores the impact of GST on vehicle loans in India.
What Is GST And Its Structure?
To put it in simple terms, GST is a multi-faceted tax that is levied on the value that each participant in the supply chain adds to the product or service, rather than just the final selling price. It comprises four key rates: 5%, 12%, 18%, and 28%. Different product and service categories are systemically categorised into either of the four rates. In the context of vehicles, there’s a 12% – 28% GST for most of them. This rate is irrespective of the vehicle body type, model, engine capacity, or make.
One thing to note is that it excludes hybrid and electric vehicles. In order to maintain some level of differentiation, there is additional cess levied above the standard GST rate of 28%, depending on the segmentation of the vehicles. The cess value could range anywhere from 1% to 15%.
Effect Of GST On Commercial Vehicles
Commercial vehicles, which include those used for transporting passengers and goods such as trucks, vans and buses, are subject to varying GST rates, ranging from 12% to 28%. The uniform tax rate and Income Tax Credit (ITC) provision under GST have made commercial vehicles more affordable for businesses. This has led to an increase in the demand for commercial vehicle loans as businesses look to upgrade or expand their fleets.
With the availability of ITC, businesses have a chance to improve their cash flow by reducing their GST liability. This improved cash flow can then be utilised to manage loan repayments more efficiently. Not only that, but the logistics sector, which heavily relies on commercial vehicles, has benefited from the renewed GST structure. The reduction in vehicle costs and the streamlined tax structure have enabled easier financing options, facilitating growth in the sector.
Here is a chart showing the different GST rates that are applied to commercial vehicles:
| GST rate of 12% | GST rate of 18% | GST rate of 28% |
| Tractors (excluding road tractors) | Refrigerated motor vehicles like Reefer trucks | Road tractors used for semi-trailers with engine capacity exceeding 1800cc |
| Trailers used in agricultural activities | Bio-fuel buses used in public transport | Motor part accessories |
| Parts of a tractor, e.g. gearbox assembly | Motor vehicles used for the transport of goods | |
| Select purpose vehicles (lorries used in concrete mixing, crane lorries) |
Influence On Loan Amounts And EMIs
The cost of a vehicle directly impacts the loan amount a borrower needs to finance the purchase. With GST leading to varying changes in vehicle prices, the loan amounts and corresponding Equated Monthly Instalments (EMIs) have also seen minor adjustments.
For instance, consider a commercial vehicle like a medium-sized truck used for logistics. In India, their rates start from Rs. 10,00,000. The introduction of GST and the subsequent reduction in taxes led to a decrease in the overall cost of such trucks. This reduction in price made these trucks more affordable for businesses, potentially lowering the loan amounts and EMIs for buyers. Below is a hypothetical example where the price of the truck is considered to be Rs. 10,00,000.
| Details | Pre-GST | Post-GST |
| Ex-Factory Price | 10,00,000 | 10,00,000 |
| Excise Duty (12.5%) | 1,25,000 | – |
| VAT (14.5%) | 1,58,625 | |
| CST (2%) | 20,000 | |
| Octroi (5%) | 50,000 | |
| Other charges | 10,000 | 10,000 |
| GST (28%) | – | 2,80,000 |
| Total Price | 13,63,625 | 12,80,000 |
| Price Difference | 83, 625 |
Pre-GST total price: Rs. 13,63,625
Post-GST total price: Rs. 12,80,000
Savings post-GST: Rs. 83,625
Simplified Taxation And Transparency
One of the broader benefits of GST has been the simplification and transparency it introduced into the tax system. The streamlined tax structure reduced the cascading effect of multiple taxes, making the overall cost of vehicles more transparent. This clarity is beneficial not only to the consumers but also to financial institutions, as it provides a vivid picture of the cost components and the financing requirements.
Summing Up
The introduction of GST altered vehicle prices through a unified tax regime. GST influenced the loan amounts, EMIs, and overall affordability of vehicles while slashing or hiking prices for some segments. Additionally, the provision for Input Tax Credit and the simplified taxation of pre-owned vehicles added layers of benefits and complexities to the vehicle loan landscape. As the GST framework continues to evolve, the automobile sector and vehicle financing industry face its dynamic impact. The way buyers and sellers consume these products and services will be key to analysing and adapting to the evolving vehicle financing field.
FAQs
What is the Impact of GST on Four Wheelers?
The most applicable GST rate for cars is 28%, which applies to both personal and commercial motor vehicles.
Can Businesses Claim Input Tax Credit (ITC) on the GST Paid for Commercial Vehicles?
Yes, businesses can claim Input Tax Credit (ITC) on the GST paid for purchasing commercial vehicles. This ITC can be set off against their GST liability, reducing the overall cost of the vehicles and improving cash flow for the business.
What is the GST Rate Applicable to Commercial Vehicles?
The GST rate applicable to commercial vehicles is 28%, with no additional cess. This uniform tax rate has replaced the multiple pre-GST taxes, simplifying the tax structure for commercial vehicle buyers.
How Has GST Benefited The Logistics Sector In Terms Of Vehicle Financing?
GST has benefited the logistics sector by reducing the cost of commercial vehicles and simplifying the tax structure. This proved beneficial for logistics companies to finance new vehicle purchases through loans, driving growth in the sector.
