Proposed GST rate tweaks on automobiles may end classification disputes

In upcoming sweeping reforms, the GST on automobiles - currently in the highest tax bracket - will be restructured to resolve classification disputes related to engine capacity and vehicle size, ultimately benefiting the common man, according to government sources.

Presently, automobiles are taxed at 28 per cent, which is the highest GST slab. A compensation cess, ranging from 1 to 22 per cent, is levied on top of this rate, depending on the type of vehicle.

The total tax incidence on cars, depending on engine capacity and length, 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.

Sources said, as per the Centre's proposal for moving the GST system to a two-tier rate structure of 5 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 will boost demand and sales, as cars will become affordable. Thereby boosting 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. 

Currently, GST is a four slab structure of 5, 12, 18 and 28 per cent, where essential items are either taxed at nil or a 5 per cent rate and luxury and sin goods are at 28 per cent slab.

The Centre has proposed to the rate rationalisation GoM to have only 2 slabs in GST -- 5 and 18 per cent -- and a 40 per cent rate only for a select few goods.

Sources said the 40 per cent rate would apply to 5-7 goods.