By Parul Nagpal, Tax Partner, EY IndiaIndia’s automobile industry is entering an exciting phase of growth. Today, India is the world’s third-largest automobile market, contributing nearly 7% to 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 sector will play a key role in India’s journey to becoming a global manufacturing hub.As GST completes nine years, the focus may now shift from implementation to the future. The next phase of reforms may ensure that India’s tax system keeps pace with the changing needs of the automotive industry.GST has already transformed the sector. Multiple indirect taxes have given way to a simpler structure, with 5% GST on electric vehicles, 18% as the standard rate for most vehicles and 40% for a few luxury and high-end vehicles. Also, the standard rate of 18% for most auto components is a welcome move. The removal of compensation cess on most vehicles and the move towards a more streamlined rate structure have reduced classification disputes and brought greater certainty for businesses. These reforms have also improved the way the industry operates. A simpler tax structure has made vehicles more affordable, improved credit flow across the supply chain and removed interstate tax barriers. Manufacturers have been able to optimise warehouses, redesign supply chains and improve operational efficiency. Together, these changes have strengthened India’s position as a competitive manufacturing destination.However, as the industry evolves, the GST framework must keep pace. Several targeted interventions may help address emerging challenges and unlock the sector’s full potential:
- Correcting the inverted duty structure in EVs: While electric vehicles attract GST at 5%, 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.
- Resolving legacy compensation cess credits: With the cess no longer applicable on most vehicles, companies continue to hold significant unutilised credits. Allowing a one-time refund or flexible utilisation would unlock capital for reinvestment in growth and innovation.
- Rationalising input tax credit provisions: As mobility models evolve with the rise of fleet operators, shared mobility and mobility-as-a-service, the GST framework should reflect these changes. Simpler and more consistent credit rules would reduce disputes and improve ease of doing business.
- Providing clarity on key tax issues: Areas such as dealer incentives, warranty reimbursements and valuation continue to create avoidable litigation. Clear guidance from the tax administration would enhance certainty and reduce compliance friction
- Improving 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.
- Rationalising GST on used vehicles: The pre-owned vehicle market is a critical and growing segment of the automotive ecosystem. However, GST applicability, especially under margin schemes and varying conditions, continues to create interpretational challenges for dealers and organised players. The industry has been advocating for a simpler and more uniform framework for taxation of used vehicles to promote formalisation, improve transparency and support the growth of the organised resale market.
As initiatives such as PLI 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.Nine years after its introduction, GST has successfully created a common national market and transformed India’s indirect tax system. For the automobile sector, it has reduced tax cascading, improved efficiency and brought greater certainty. The next phase of reforms does not require a complete overhaul. Instead, it may focus on fine-tuning the system aligning GST rates with emerging technologies, resolving legacy credit issues, simplifying input tax credit provisions and making refunds faster.A good tax system should grow with the economy it supports. As India’s automotive industry prepares for its next phase of growth, GST has the opportunity to become not just a tax reform, but a key enabler of investment, innovation and global competitiveness. Anshul Girotra, Senior Tax Professional, EY India, also contributed to the article.
