GST on Motor Vehicle Purchase & Sale in India (2026)

Updated: 3 June 2026 | CGST Act, 2017 — Sec 17(5) & Compensation Cess Act

New cars attract 28% GST plus compensation cess ranging from 1% (small petrol cars) to 22% (luxury SUVs). Electric vehicles pay only 5% GST. Used car dealers pay 12% GST only on the profit margin. Businesses generally cannot claim ITC on car purchases due to Section 17(5) block.

17(5)

ITC on cars is blocked for most businesses
Exceptions: goods transport, renting, driving school, dealer stock-in-trade

GST Rate on New Motor Vehicles — Complete Table

Vehicle Category	GST Rate	Compensation Cess	Effective Rate
Small petrol car (<4m, engine ≤1200cc)	28%	1%	29%
Small diesel car (<4m, engine ≤1500cc)	28%	3%	31%
Mid-size petrol car (≤4m, engine >1200cc)	28%	20%	48%
Large/luxury car (>4m or engine >1500cc)	28%	20%	48%
SUV (>4m, >1500cc, ground clearance >170mm)	28%	22%	50%
Electric vehicles (all categories)	5%	Nil	5%
Hybrid vehicles	28%	15%	43%
Two-wheeler (engine ≤350cc)	28%	Nil	28%
Two-wheeler (engine >350cc)	28%	3%	31%
Three-wheeler	28%	Nil	28%
Buses / trucks (commercial vehicles)	28%	Nil/lower	28%

ITC on Motor Vehicles — What Businesses Can and Cannot Claim

Section 17(5) of the CGST Act, 2017 categorically blocks Input Tax Credit on motor vehicles and other conveyances. This means the GST paid at the time of purchase cannot be set off against your output tax liability in most cases. The intent is to restrict ITC on items used for personal or mixed use.

Situation	ITC Available?	Reason
Company car for directors/employees	No	Blocked u/s 17(5)
Car for sales team commute	No	Blocked u/s 17(5)
Truck/vehicle for transporting goods	Yes	Exception — goods transport
Cab operator buying cars for taxi service	Yes	Exception — passenger transport service
Driving school buying car for training	Yes	Exception — driving training
Dealer buying cars as stock-in-trade	Yes	Exception — further supply of vehicles
Manufacturer — demo vehicle for test drive	Yes	Used for taxable outward supply promotion

GST on Sale of Used Cars — Margin Scheme

When a GST-registered dealer sells a used or second-hand motor vehicle, GST at 12% applies on the margin (selling price minus purchase/depreciated cost), not the full sale value. This prevents double taxation and is governed by Notification No. 8/2018-CT (Rate).

Scenario	Tax Base	GST Rate
Dealer buys at ₹4L, sells at ₹5L	₹1L margin	12% = ₹12,000
Dealer buys at ₹6L, sells at ₹5.5L (loss)	No margin / negative	No GST
Company sells depreciated car (WDV ₹3L) at ₹4L	₹1L (sale − WDV)	12% = ₹12,000
Individual sells personal car to another individual	N/A	No GST (unregistered)

Trade-In and Exchange Value in Car Deals

When a customer exchanges an old car while buying a new one, the dealership typically offers a trade-in value. For GST purposes:

GST on the new car applies on the full invoice/agreement value, not on the net amount after trade-in deduction.
The trade-in vehicle received by the dealer, when resold, attracts 12% GST on its margin.
If the customer is a business that had claimed ITC on the old vehicle, reversal of ITC may be required at the time of disposal.

Frequently Asked Questions

What is the GST rate on purchase of a new car in India?

The GST rate on new cars in India depends on the size, engine capacity, and fuel type. Small petrol cars under 4 metres with engine capacity up to 1200cc attract 28% GST plus 1% cess (total 29%). Small diesel cars under 4 metres with engine capacity up to 1500cc attract 28% GST plus 3% cess (total 31%). Mid-size petrol cars under 4 metres but with engine above 1200cc attract 28% GST plus 20% cess (total 48%). Large cars and SUVs over 4 metres with engine above 1500cc and ground clearance above 170mm attract 28% GST plus 22% cess, making the effective rate 50%. Electric vehicles are taxed at just 5% GST with no cess. Hybrid vehicles attract 28% GST plus 15% cess. Two-wheelers with engine above 350cc attract 28% GST plus 3% cess, while those at or below 350cc attract only 28% GST. Buses and trucks attract 28% GST with a lower or nil cess. On top of GST, states also levy road tax and registration charges which are separate levies outside the GST framework.

Can a business claim Input Tax Credit (ITC) on the purchase of a car?

Generally, Input Tax Credit on motor vehicles is blocked under Section 17(5) of the CGST Act, 2017. This means businesses cannot claim the GST paid on purchase of a car as an input credit to offset their GST liability. However, there are specific exceptions where ITC is available: (1) When the motor vehicle is used for transportation of goods — a truck or cargo van used by a manufacturer or trader qualifies. (2) When the vehicle is used for providing taxable transportation services to passengers — i.e., a cab company or taxi operator. (3) When the vehicle is used for imparting driving training by a driving school. (4) When a car dealer purchases vehicles as stock-in-trade for resale — since the vehicle itself is their product. (5) Manufacturers of motor vehicles can claim ITC on demonstration vehicles used for test drives. For all other businesses — offices buying cars for employee commute, executives, etc. — ITC remains blocked. Interest and penalty may be levied if ITC is wrongly claimed on blocked items like cars.

What is the GST on sale of used or second-hand cars?

The GST treatment of used or second-hand motor vehicles depends significantly on who is selling them. If an individual (unregistered person) sells a used car to another individual, no GST applies as individuals are not registered dealers. However, if a registered dealer or company sells used cars, GST applies at 12% on the margin amount — i.e., the difference between the selling price and the purchase price (profit). This is called the margin scheme under Notification No. 8/2018-CT (Rate). Importantly, GST is applicable only on the positive margin; if the vehicle is sold at a loss, there is no GST. For example, if a dealer buys a used car for ₹5,00,000 and sells it for ₹6,00,000, GST at 12% applies only on ₹1,00,000 margin = ₹12,000 GST. Depreciation under the Income Tax Act can reduce the margin for businesses that have claimed depreciation. Exchange (trade-in) value offered for the old car is deducted from the sale price of the new car for the purpose of GST calculation.

Is GST applicable on the exchange or trade-in of an old car at a dealership?

Yes, GST implications arise on both sides of a trade-in or exchange transaction at a car dealership. When a customer trades in their old car while buying a new one, the transaction is treated as two separate supplies for GST purposes. First, the new car sale by the dealer to the customer — GST applies on the full invoice price of the new car at the applicable rate (28% + cess). The trade-in value offered for the old car reduces the cash consideration payable by the customer but does not reduce the GST base for the new car. Second, the old car taken by the dealer — if the dealer later sells the old car as a used vehicle, GST at 12% on margin applies as described above. If the customer is a business and the old car is a business asset (not a blocked credit item), the customer may need to reverse ITC or pay GST on the transaction value. Dealers must ensure proper valuation and tax invoicing for both legs of the transaction to remain compliant under the GST law.

What GST rate applies to electric vehicles, and are there any exemptions?

Electric vehicles (EVs) enjoy a significantly reduced GST rate to promote adoption of clean energy transportation. All categories of electric vehicles — two-wheelers, three-wheelers, four-wheelers, and buses — attract only 5% GST irrespective of engine capacity, size, or value. This rate was reduced from 12% to 5% effective 1 August 2019 under GST Council recommendations to make EVs more accessible. The 5% rate applies on the sale price of the EV. There is no cess applicable on electric vehicles. Additionally, EV chargers and charging stations also attract only 5% GST. Leasing of electric vehicles has also been rationalised. Under the FAME II scheme and state-level subsidies, EVs may also attract additional incentives, but those are outside the GST framework. Hybrid vehicles, however, do NOT enjoy the same concessional rate — they attract 28% GST plus 15% compensation cess, making them more expensive than pure EVs from a tax perspective. Businesses leasing or renting out EVs may be eligible to claim ITC on the purchase of EVs if the activity qualifies as a taxable service.

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