ITC: Allowed on repairs, rent, ads, capital goods; not on vehicle purchase under margin scheme
TCS: 1% on vehicle sales above ₹10 lakh (including GST)
Introduction – GST for Automobile Dealerships in India
Goods and Services Tax (GST) has transformed the Indian automobile sector. For automobile dealers – whether selling new cars, two-wheelers, commercial vehicles or pre-owned vehicles – understanding GST compliance is not optional; it is a statutory requirement under the CGST Act, 2017. With the rollout of GST Reform 2.0 in September 2025, the tax structure has been further streamlined. This comprehensive guide covers GST for automobile dealers, GST on car sales, GST registration for car dealers, margin scheme for used cars, ITC for automobile dealers, and all compliance aspects you need to know in 2026.
🚘 GST Rates on New Vehicles (2026)
Under the GST Reform 2.0 effective from 22 September 2025, the compensation cess has been abolished and rates rationalised. Automobile dealers must apply the correct GST rate on cars based on vehicle category:
Vehicle Type
Criteria
GST Rate
⚡ Electric Vehicles (EV)
All fully electric cars
5%
🚙 Small Petrol/CNG Cars
Engine ≤1200cc & length ≤4000mm
18%
⛽ Small Diesel Cars
Engine ≤1500cc & length ≤4000mm
18%
🏎️ Mid-size / SUVs
Exceeding small-car limits
40%
✨ Luxury Cars
Higher engine capacity/length
40%
🏍️ Two-Wheelers ≤350cc
Commuter & mid-range
18%
🏍️ Two-Wheelers >350cc
Premium motorcycles
40%
🚛 Commercial Vehicles
Trucks, buses, goods carriers
18%
📌 Based on 56th GST Council Meeting recommendations
📝 GST Registration for Automobile Dealers – Eligibility & Threshold
Under Section 22 of the CGST Act, 2017, GST registration for automobile dealers is mandatory if aggregate turnover exceeds:
🟡₹20 lakh – for dealers providing services (repairs, maintenance) in most states
🟡₹10 lakh – for special category states (North-Eastern, Himachal Pradesh, etc.)
Even if turnover is below threshold, voluntary GST registration is advisable for claiming ITC and for dealing with OEMs and corporate buyers who require a valid GSTIN.
📘Sections 16 & 17: Eligibility and restrictions on Input Tax Credit
📘Section 17(5): Blocked credits – ITC not available on certain goods/services
📖 Bare Act Reference: Section 22 of CGST Act, 2017 – mandatory registration threshold
💰 Margin Scheme for Used Vehicles – Rule 32(5) Explained
The margin scheme under GST is a game-changer for used car dealers. Under Rule 32(5) of the CGST Rules, GST is payable only on the dealer’s profit margin (selling price minus purchase price), not on the full sale value.
🔹 GST Rate: 18% on the margin for all used vehicles
🔹 Negative Margin: If sold at a loss, no GST is payable
🔹 No ITC on Vehicle Purchase: You cannot claim ITC on the purchase of used vehicles
🔹 ITC Allowed on Everything Else: Repairs, spare parts, rent, advertising, capital goods
📌 Example: Dealer buys used car for ₹5,00,000 and sells for ₹5,50,000. Margin = ₹50,000. GST = 18% of ₹50,000 = ₹9,000.
🧾 ITC for Automobile Dealers – Landmark Kerala AAR Ruling
In a landmark ruling (Goexotic Plus91 Motors Pvt. Ltd. – AAR No. KER/42/2025), the Kerala Authority for Advance Ruling held that:
✅ITC Allowed on: Spare parts, repairs, refurbishment, showroom rent, advertising, telephone, professional fees, capital goods (workshop machinery, computers)
❌ITC Not Allowed: Only on the purchase of used motor vehicles
✅No ITC Reversal: Even when selling under margin scheme, no reversal of ITC on common business inputs
💡 Practical Takeaway: If you spend ₹50,000 on parts to refurbish a car, you can claim 18% ITC on those parts – which can be used to pay GST on the margin.
⚠️ Common GST Mistakes by Automobile Dealers & Solutions
Mistake: Charging GST on full sale value of used cars ✅ Solution: Apply margin scheme under Rule 32(5) – GST only on profit
Mistake: Not claiming ITC on repairs, rent, or advertising ✅ Solution: Claim ITC on all business inputs except used vehicle purchase
Mistake: Filing GSTR-3B without reconciling with GSTR-1 ✅ Solution: Reconcile books with GSTR-1 before filing
Mistake: Not collecting TCS on vehicle sales above ₹10 lakh ✅ Solution: Collect 1% TCS under Section 206C(1F) on invoice value
Mistake: Not issuing e-invoice for B2B supplies ✅ Solution: Generate e-invoice on IRP portal for all B2B transactions
🚨 Penalties & Risks for Non‑Compliant Dealers
⏳Late Filing Penalty: ₹50 per day (₹25 CGST + ₹25 SGST) for each day of delay in GSTR-3B / GSTR-1
💰Interest: 18% per annum on unpaid tax liability
🔁ITC Reversal: Wrongful availment leads to reversal with interest & penalty
⚖️Prosecution: For tax evasion above ₹5 crore – imprisonment up to 5 years under Section 132
📩GST Notice: Significant wave of notices to dealers for improper margin scheme application
Under Section 206C(1F) of the Income Tax Act, automobile dealers must collect Tax Collected at Source (TCS) on sale of motor vehicles exceeding ₹10 lakh:
📊Rate: 1% of the sale consideration (including GST)
📌Applicability: On sale of any motor vehicle (car, SUV, two‑wheeler, commercial) above ₹10 lakh
🔄TCS vs GST: TCS is not includible in GST taxable value
📅Compliance: Deposit TCS, file Form 27EQ quarterly, issue TCS certificate
❓ Frequently Asked Questions
Yes, if aggregate turnover exceeds ₹40 lakh (goods) or ₹20 lakh (services) in most states. Even below threshold, voluntary registration is advisable.
5% for electric vehicles, 18% for small petrol/diesel cars (≤1200cc/≤1500cc & length ≤4m), and 40% for large cars, SUVs, and luxury vehicles.
Under Rule 32(5) of CGST Rules, GST is payable only on the dealer's profit margin (selling price minus purchase price) at 18%, not on the full sale value.
Yes – ITC is allowed on repairs, spare parts, rent, advertising, professional fees, and capital goods. ITC is not allowed only on the purchase of used vehicles.
Under Section 206C(1F), dealers must collect 1% TCS on sale of motor vehicles exceeding ₹10 lakh – calculated on invoice value including GST.
Regular dealers file GSTR-1 (monthly/quarterly) and GSTR-3B (monthly). Composition dealers file CMP-08 (quarterly) and GSTR-4 (annual).
No – private individual-to-individual sales are fully GST-exempt. GST applies only when a registered dealer sells the vehicle.
18% for motorcycles ≤350cc and 40% for motorcycles >350cc. Electric two‑wheelers attract 5% GST.
