India's automobile industry, the world's third-largest automobile market, is at a pivotal juncture as the Goods and Services Tax (GST) completes nine years. According to Parul Nagpal, Tax Partner at EY India, the sector contributes nearly 7% to India's GDP and almost half of the country's manufacturing GDP, while supporting over 37 million jobs. With electric mobility, localisation, exports, and advanced manufacturing gaining momentum, the GST framework must evolve to sustain growth and enhance global competitiveness.
Current GST Structure for Automobiles
GST has simplified the indirect tax regime for the auto sector, with the following rate structure as reported by Nagpal:
| Vehicle / Component Category | GST Rate |
|---|---|
| Electric vehicles (EVs) | 5% |
| Standard vehicles | 18% |
| Luxury and high-end vehicles | 40% |
| Most auto components | 18% |
The removal of compensation cess on most vehicles and a more streamlined rate structure have reduced classification disputes and brought greater certainty for businesses, according to Nagpal.
Inverted Duty Structure Hampers EV Exports
One key reform area is the inverted duty structure in EVs. Nagpal pointed out that while EVs attract 5% GST, key inputs such as batteries and power electronics are taxed at higher rates. This leads to accumulation of input tax credit and blocks working capital. Aligning GST rates across the EV value chain, along with faster refunds, would improve liquidity and support India's electrification goals, she said.
Legacy Compensation Cess Credits
With the compensation cess no longer applicable on most vehicles, companies continue to hold significant unutilised credits. Nagpal advocated for a one-time refund or flexible utilisation to unlock capital for reinvestment in growth and innovation.
Refund Efficiency and Export Processes
Faster GST refunds and seamless export mechanisms are critical for improving liquidity and strengthening the global competitiveness of Indian vehicles and auto components. Nagpal emphasised these improvements in the context of India's manufacturing ambitions.
Rationalising GST on Used Vehicles
The pre-owned vehicle market is a critical and growing segment. However, GST applicability, especially under margin schemes, creates interpretational challenges. A simpler and more uniform framework would promote formalisation, improve transparency, and support the organised resale market, Nagpal noted.
Implications for Trade Policy
As initiatives such as PLI (Production Linked Incentive) and PM E-DRIVE gather momentum, tax policy should continue to support India's larger manufacturing ambitions. A stable, predictable, and business-friendly GST framework may encourage investment in electric mobility, advanced manufacturing, and future technologies, according to Nagpal. For import/export professionals, resolving the inverted duty structure and improving refund efficiency directly impact the cost competitiveness of Indian auto exports in global markets.
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