VARIOUS GST ISSUES IN THE EV SEGMENT

GST related issues – EV segment

1. GST Implication on Government Subsidy (FAME)
2. GST on Passenger Transportation Sector – EVs
3. GST on sale of used/old Electric Vehicles

Introduction – EV Segment & GST links

The electric vehicle (EV) industry in India is experiencing a significant boom, driven by various factors including government initiatives, technological advancements, and increasing consumer demand. We will look into issues concerning GST aspects of it, however, before that, we need to understand why it is important to stress on this industry.

Here are the key aspects of this burgeoning sector-

Benefits under the GST Act:

EVs in India are subject to a 5% GST rate, while internal combustion engine (ICE) vehicles are taxed at a 28% GST rate. Additionally, ICE vehicles are subject to a compensation cess of up to 22% on top of the 28% GST leading to a total tax of 50%. In contrast, EVs are exempt from the compensation cess, resulting in a significantly lower overall tax burden compared to traditional vehicles.

This difference in GST rates between EVs and ICE vehicles, along with the benefit of zero cess on EVs, helps offset their higher upfront costs to some extent.

Reduced import duty on EVs:

The CBIC has issued a Notification. No 19/2024 customs on 15th March 2024 whereby it has reduced the customs duty on imported EVs with a minimum CIF (Cost, Insurance, and Freight) value of $35,000 (around ?29 lakh) to

• 15%- if none of the components, parts, or sub-assemblies as specified in the notification are inter-connected with each other and not mounted on a chassis.
• 35%- if any of the components, parts, or sub-assemblies are interconnected with each other but not mounted on a chassis.

Previously, imported EVs attracted customs duty ranging from 70-100%, depending on the engine size and CIF value.

However, this lowered import duty is applicable for a period of 5 years for companies that set up EV manufacturing facilities in India with minimum investment criteria as specified in Para1.3.5 and para1.3.6 of the scheme.

FAME scheme by central government:

The FAME India Scheme, which stands for Faster Adoption and Manufacturing of Electric Vehicles in India, was launched in 2015 as part of the National Electric Mobility Mission Plan to promote electric and hybrid vehicles through financial incentives. This Scheme has operated through various phases and the latest is the upcoming Phase- III.

Benefits under Income Tax:

Individuals purchasing electric vehicles could avail of income tax benefits under Section 80EEB of the Income Tax Act 1961. This section provided a deduction of up to ?1.5 lakh on the interest paid on loans taken to purchase electric vehicles, subject to the condition that the loan was sanctioned by 31/03/2023.

In the coming budgets, it is expected to provide specific perquisite valuation rules for EVs and to provide clarity on aspects such as reimbursement of cost incurred in relation to maintenance and recharge of batteries, and battery capacity (instead of engine capacity).

This will encourage corporates to provide EVs-oriented schemes to employees.

State level benefits:

• Most states have exempted the fees for issuing and renewing registration certificates.
• Additionally, several state governments have introduced incentives to promote the use of electric vehicles (EVs). For instance, Tamil Nadu has exempted 100% of the motor vehicle tax for EVs registered in the state, applicable to vehicles registered between January 1, 2023, and December 31, 2025.
• Similarly, under the Delhi Electric Vehicle Policy, the Delhi government has announced that two- and four-wheeler electric vehicles will be exempt from road tax.
• Older vehicles that contribute to pollution are subject to a 'green tax' after 15 years, but this tax is exempt for electric vehicles (EVs).
• Additionally, electric vehicles are not required to obtain a pollution control certificate (PUC), which is mandatory for diesel and petrol vehicles.

Encouragement to corporates to prefer EV Vehicles

Cost Stability: As oil prices rise, the cost of operating internal combustion engine (ICE) vehicles has surged by 20-30%. In contrast, EVs offer more stable operating costs, making them a financially viable option for companies

Government Incentives: Many businesses anticipate future government subsidies and tax incentives for adopting EVs, which can further reduce operational costs and promote sustainability initiatives

Enhanced Employee Benefits: Offering EVs as part of employee transportation not only promotes a greener image but also serves as an attractive benefit for current and prospective employees. Companies can implement salary sacrifice schemes, allowing employees to lease EVs at reduced cost.

Brand Image and Corporate Social Responsibility (CSR): Adopting electric vehicles as part of the corporate fleet demonstrates a commitment to sustainability and environmental responsibility. This can enhance the corporate brand image and contribute positively to CSR initiatives.

1. GST Implication on Government Subsidy (FAME)

The FAME (Faster Adoption and Manufacturing of Electric Vehicles) initiative is a key component of India's efforts to promote electric mobility. Launched by the Indian government, FAME is designed to accelerate the adoption of electric and hybrid vehicles in the country, with the ultimate goal of reducing vehicular emissions, decreasing dependence on fossil fuels, and promoting cleaner and sustainable transportation options.

FAME provides financial incentives to buyers of electric vehicles (EVs), including two-wheelers, three-wheelers, four-wheelers, and buses. These incentives help make EVs more affordable, thereby encouraging more people to switch to electric mobility.

Phases of the FAME Scheme:

• FAME I: Launched in 2015, the first phase of the FAME scheme focused on providing direct subsidies to consumers for purchasing EVs, along with grants for setting up charging infrastructure and promoting pilot projects in various cities.
• FAME II: Launched in 2019, the second phase of the scheme extended the benefits of FAME I with a larger budget and a more comprehensive approach. FAME II emphasizes the adoption of electric buses in public transport, the establishment of charging infrastructure, and greater support for electric two-wheelers and three-wheelers, which are more prevalent in India.

GST provision:

Section 2(31) of the CGST Act 2017-

 "consideration" in relation to the supply of goods or services or both includes-

1. any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government

Section 15 of the CGST Act 2017-

(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

(2) The value of supply shall include Interalie-

(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

However, the word Subsidy is not defined in the GST Act. We refer to the dictionary meaning for understanding the meaning of Subsidy:

1. Cambridge Dictionary: Money given as part of the cost of something, to help or encourage it to happen.
2. Oxford Dictionary: money that is paid by a government or an organization to reduce the costs of services or of producing goods so that their prices can be kept low.

Therefore, any sum of money offered to reduce the price of goods or services would covered under the meaning of subsidy.

From the above definition & meaning only those subsidiaries provided by Central or State government that have a direct nexus to price of goods /services would be excluded from taxable value.

Reason behind the exclusion of subsidy from taxable value:

In the case of Commissioner of Central Excise, Bangalore Vs. Mazagon Dock Ltd the Hon’ble Supreme Court held that subsidy given by the Govt. is not paid by the buyer of the goods. The tribunal’s ruling on the entire subsidy being non-includable was incorrect and set aside. In the present case also, the subsidy given by the govt. is intended to be a reduction from amount paid by the recipient, the same shall be excluded from tax computation as well.

• Subsidies are not considered part of the business transaction between the supplier and the buyer but are rather an external financial support aimed at reducing the final cost to the consumer.
• Including government subsidies in the taxable value would lead to double taxation. The subsidy is meant to reduce the price of goods or services for the consumer, and if taxed, it would negate the benefit provided by the government.

One such instance would the FAME incentive provide by the central government to promote the sale of Electric Two wheeler vehicle. The following illustration provides  cost structure from OEM to dealer & dealer to the ultimate customer, when FAME is considered in taxable and when its not:

*Figures are not actuals & only for illustration.

Following Particle challenges are faced by automobile dealers in passing on the FAME incentive to the ultimate customers.

1. FAME incentives are 1^st passed on to the ultimate customer by the Original  equipment manufacture (OEM) through the dealers. Once the vehicle is sold to the ultimate customer the dealer uploads the relevant details of the said customer ( PAN, Aadhar, Invoice, vehicle Reg No etc) in the FAME scheme portal to processes the subsidy which would be then credited to OEM. Where there is any mismatch in the details (name, address, phone no) with those provided during Vehicle registration, such application would be rejected.

2. FAME incentives are applicable on one vehicle per category per person, i.e., no individual can purchase more than one EV of the same category & claim incentive twice under scheme. However, there is no restriction for number of vehicle to be purchased by other than individuals.

Where such benefits passed to ultimate customer in any of the above cases & dealer is unable to recover the subsidy amounting to Rs 25,000 from those ineligible customers, OEM would then recover same from the dealer.

Further, Operational Guidelines for Electric Mobility Promotion Scheme-2024 issued by MINISTRY OF HEAVEY INDUSTRIES under Phara 7 provides for Billing mechanism for sale of vehicle to be followed by OEM & its dealers, which states that all OEM and its dealer would ensure that incentive under the scheme should not adversely affect taxes at any stage. Which mean FAME is to be reduced post GST. [refer column no. 2 in tables above]

Constitutional provision

The 9^th Schedule of the constitution contains a list of Central & State laws which can’t be challenged in courts. The laws included in the Ninth Schedule are immune to being challenged in the court on the grounds of inconsistency with the fundamental rights guaranteed by the Constitution of India, this includes - Industries (Devlopment & Regulation) Act, 1951 which governs the activity of Ministry of Heavy Indsutries.

Article 31B of the constitution provides protection to acts and regulations included in the Ninth Schedule from being challenged and invalidated on the ground of contravention of any of the fundamental rights.

However, in the case of IR Coelho Vs State of Tamil Nadu Hon’ble Supreme Court, held that all laws (including those in the 9^th Schedule)place after 24, 1973 would be open to Judicial review if they violate the basic structure of the constitution. The laws placed in the 9^th schedule would be open in the court if they violate fundamental rights guaranteed under Article14, 19,20 &21 of the constitution.

Article 14 of the Indian constitution states that the treatment of equitable classification has to be the same, like to be treated equally. Generally, in case of a subsidy/incentive grant by Govt having nexus to price would be reduced from the taxable value, but in case of FAME subsidy as per the above guideline it is included as part of taxable value which would increase the tax burden on the ultimate customer.

On this backdrop, following question arises:

1. Whether said guidelines issued by the authority/Ministry having no power to dictate terms in GST matters, override the effect of section 15 of the CGST Act, will be valid?
2.  Based on the above guidelines whether the differential treatment for govt subsidy/incentives in  arriving at taxable value, would it pass the test of Article 14 of the Indian constitution?

Practical position

Considering the above practical challenge & guideline issued the OEM and dealer prefer to consider such incentive on the invoice value, this would increase the cost to ultimate customers & also partially defeats the purpose of incentivizing/ reducing the price of the product through such subsidy.

Authors View:

The Auto Mobile industry should make a representation to the MINISTRY OF HEAVEY INDUSTRIES specifying the specific provision under the GST Act for the reduction of Govt subsidy from taxable thereby enabling the ultimate customer to ripe the benefit of such incentive without the effect of double taxation.

Also to design the FAME scheme portal to enable dealers to identify customers who are ineligible for FAME incentive at the stage of invoicing or before delivery of vehicle, this would ensure a check mechanism for dealers while processing such incentive to the ultimate customer.

2. GST on Passenger Transportation Sector – EVs

Renting v/s Transportation of Passengers:

As per Circular No. 177/09/2022-TRU Entry 15:

Renting of motor vehicle with operator for transport of passengers falls under Heading 9966. According to the explanatory notes to heading 9966, the service covered here is renting of motor vehicle for transport of passengers for a period of time where the renter (customer) defines how and when the vehicles will be operated, determining schedules, routes and other operational considerations.

Eg: Shoffr, Rego Cabs, Ola Rentals, Uber/Ola Outstation and includes all tour and travel operators who rent out vehicles with drivers across the country.

‘Passenger transport services’ on the other hand fall under Heading 9964. According to the explanatory notes Heading 9964 covers passenger transport services over pre-determined routes on pre-determined schedules.

Eg: Ola, Uber, Rapido, Bluesmart.

The circular also clarified that where the body corporate rents the motor vehicle for a period of time, during which the motor vehicle shall be at the disposal of the body corporate(i.e., to use in the manner as it likes subject to agreement with the person providing vehicle on rent), the service would fall under Heading 9966, and the body corporate shall be liable to pay GST on the same under RCM and not otherwise.

Rate of Tax on transportation of passengers and renting of transport vehicles

(NN 11/2017 CT(R)):

Note: In terms of Entry 17 of NN 12/2017 CT(R) services by way of transportation of passengers by e-rickshaw or metered cabs is exempt if not provided through E-commerce operators.

The Delhi High Court in the case of UBER INDIA SYSTEMS PRIVATE LIMITED v/s UNION OF INDIA & ANR. (W.P.(C) 14579/2021 & CM APPL. 45963/2021) upheld that rickshaw or metered cabs provided through E-commerce operators is taxable and not violative of Article 14,19(1)(g) and 21 of the Constitution.

Now the question arises, what would the GST rate be in the following cases:

• Transportation of passengers in EVs where cost of electricity is included in the consideration charged to service recipient.
• Renting of EVs (Transport vehicle) with operator where cost of electricity is included in the consideration charged to service recipient.

Author’s comments:

• Interpretation 1:

• The GST Council in their 14^th meeting recommended a concessional rate of tax i.e., 2.5%/6% as compared to regular rate of tax i.e., 9% when cost of fuel is included under Heading 9964 or 9966 for a sole reason that inputs such as fuel, etc. for a transportation sector were not in GST.
• It is also important to note that there is no GST on transmission or distribution of electricity by an electricity transmission or distribution utility as per entry 25 of NN 12/2017CT(R). Therefore, there is no GST input on electricity used to run EVs which are used to carry passengers or rented out to a third party.
• EV vehicles are listed at a GST rate of 5%, whereas other motor vehicles (other than SPVs) attract 28% + applicable cess (where applicable). This significant variance in tax rate is a testament to the country’s initiative to decarbonise road transport.
• In the case of SENIOR ELECTRIC INSPECTOR VERSUS LAXMINARAYAN CHOPRA No.- C.A. 328 OF 1958 dt. August 16^th, 1961, the Supreme Court held that the maxim “Contemporanea expositio est optima et fortissima in lege” which means that the best way to construe a document is to read it as it would have read when made as laid down by Coke was applied to construing ancient statutes but not to interpreting Acts which are comparatively modern. It was also held that unless a contrary intention appears, an interpretation should be given to the words by taking in new facts and situations, if the words are capable of comprehending them.
• The author opines that, the GST law has yet to modify the GST Rates with respect to EV vehicle related services. The concept of ‘fuel/electricity’ here should be mutandis-mutandis.
• On the basis the above and the government’s agenda to promote the EV Sector, the author is of the opinion the rate of tax would be 2.5%without ITC/6% with ITC on
  • Transportation of passengers in EVs where cost of electricity is included in the consideration charged to service recipient.
  • Renting of EVs (Transport vehicle) with operator where cost of electricity is included in the consideration charged to service recipient.

• Interpretation 2:

Based on the present wordings in the law, assuming that fuel does not include electricity, the residual provision would apply, i.e., 18% with ITC benefit.

Cost component analysis

Assuming that the mileage is 14/15 KM per litre for an average trip, the cost per km is about Rs. 6-7/KM. The rate charged in the general market is about Rs. 18-20/KM for passenger transport services. This indicates that, the cost of fuel accounts for about 50% of the service cost (excluding profit/labour charges). Balance 50% we may attribute towards vehicle cost.

The GST applicable on petrol/diesel vehicles is 28% (excluding CESS). Considering 50% of the same, 14% is the GST element. The option to claim ITC and pay taxes is provided under 12?tegory for such vehicles where cost of fuel is included.

Now, coming to the case of Electric Vehicles, the cost of fuel in the form of petrol/diesel is absent although the charging cost, i.e. electricity cost would not be as significant. Therefore, majority of the price to the consumer is related to the vehicle cost. Lets say 90%. Therefore, the applicable cost element here for transport service providers is 4.5%. Therefore, such suppliers having to discharge GST at 12% with credit eligibility seems improper. 5% or a 6% rate must be provided with credit benefit.

Recommendation:

• However, the author is of the opinion that the government should come up with the clarification on the same to resolve the ambiguity and this would be beneficial to the EV manufacturing sector and the transportation sector.
• It is also suggested that the EV Industry/Transportation Industry make a representation to the govt. to change the rate for transportation services to 2.5% with ITC benefit considering the rate of the vehicle vis-à-vis the service element i.e., the sale of EV Vehicles has concessional rate of tax compared to other motor vehicles but don’t have the concessional rate of tax while providing of the transportation of passengers in EVs.
• With the introduction of Section 11A this seems to be a possible benefit that the EV industry/Transport Industry can look forward to.
  • Section 11A was introduced through section 116 Finance Act 2024 dated 16-8-2024. This section grants power to the government to waive off short levy or non-levy of GST of any practise followed by an industry by notification in the Official Gazette.

The possible entry in NN 11/2017-CT(R) may be as follows:

3. GST on sale of used/old Electric Vehicles

The CBIC issued Notification No. 08/2018-CTR on 25^th January 2018, whereby it reduced the GST rate on items falling under schedule-IV of Notification.no 01/2017-CTR  to below rates as specified in the notification-

What shall be the valuation to be adopted for the discharge of tax as per above specified GST rates?

In the Explanation to the above notification, the valuation to be adopted in case of sale of old and used vehicles is specified as follows-

-  If a registered person has claimed depreciation on a motor vehicle under section 32 of the Income-Tax Act, the margin for GST purposes is determined by subtracting the vehicle's depreciated value on the date of supply from the consideration received for its sale. If this calculated margin is negative, no GST is required to be paid. [NN 08/2018-CTR]

This valuation method is typically used when the motor vehicle is considered a business asset where ITC is not claimed by the taxpayer and they have claimed depreciation benefit under Income tax act.

- If depreciation benefits under income tax are not claimed, the margin for GST purposes is the difference between the selling price and the purchase price of the motor vehicle. If this margin is negative, no GST is required to be paid. [Rule 32(5) of CGST Rules authorised by Section 15]

This valuation method is used when the motor vehicle is classified as inventory and depreciation benefits are not available in that case, ex: second hand car dealers.

Before we delve into the notification mentioned above, it's important to first understand Schedule IV of Notification 01/2017-CTR as referenced in that notification

Schedule- IV of Notification 01/2017-CTR refers to the goods the GST on which is payable @28%.

Based on the above, the benefit of the above notification is only available in the case where the GST rate applicable on Motor Vehicle is 28%.

What are the motor vehicles which rates < 28>

Electric Vehicles – 5%

Special Purpose Vehicles – 18% [details in note below]; Tanks & other armoured vehicles – 12%

The question now is what valuation method should be applied for motor vehicles that are not listed under Schedule IV of Notification No. 01/2017-Central Tax (Rate)?

Now, we will try to understand the GST implication on sale of motor vehicles which are not covered under Schedule- IV of Notification No 08/2018 CTR with 2 cases-

In the Below Case-1, Input Tax Credit (ITC) is disallowed under section 17(5)(a), which stipulates that ITC cannot be claimed on the sale of motor vehicles designed for the transportation of persons if the vehicle has an approved seating capacity of no more than thirteen people, including the driver. (for example – 4 wheeler EV motor vehicle purchased by a company for business purposes)

Depreciation under Section 32 of Income tax is claimed treating the motor vehicle to be a business asset.

Case-1: Treatment of motor vehicles subject to GST at 5% (or any other rate not covered under Schedule -IV)

In this case, the benefit under Notification No. 08/2018 CTR is not available, as it does not fall under the category of Schedule IV of Notification.no-01/2017 CTR, GST then, must be discharged on the sale value of the motor vehicle at a rate of 5%, regardless of whether it is sold for a profit or a loss.

Similar situations may also arise in case of motor vehicles liable to 18% rate of tax (ex: Special purpose vehicles) where the ITC is not eligible based on end consumption. This is discussed further in this article.

Case-2: A registered taxpayer engaged in the purchase and sale of second-hand vehicles:

Rule 32(5) of the CGST Rules, 2017 provides the mechanism for the scope of supply and value of GST where the person is a second-hand goods dealer. The value of supply will be calculated as the difference between the purchase price of the goods and the selling price of the goods, and where the value of supply is negative, it shall be ignored.

For goods to qualify as second-hand goods, the following conditions shall be met-

• The goods are used goods or goods that have undergone minor processing where the processing has not resulted in any change with regard to the nature of the goods.
• Input tax credit has not been availed on these goods.

In case the taxpayer is engaged in buying and selling used vehicles, the valuation shall be taken as per Rule 32(5) which says that it shall be the difference between Buying and selling price subject to non-availment of ITC.

This means that even though the Benefit of valuation as per explanation to Notification.no-08/2018 CTR is not available in case the Goods are subject to GST at other than 28%, the same benefit is available to the taxpayer engaged in buying and selling of used cars by way of Rule 32(5). This would be applicable to those persons dealing in old and used EVs and special purpose vehicles, etc. (MV < 28>

Note - However, taxpayers engaged in the buying and selling of second-hand goods cannot avail themselves of the GST rate benefit outlined in Notification No. 08/2018-CTR for motor vehicles not falling under Schedule IV. They are required to pay GST at the applicable rate for the sale of those goods.

Can the benefit of margin scheme be available to the taxpayer not in the business of buying and selling second-hand goods?

Taxpayers (Other than second hand dealers) selling second-hand vehicles can be considered as in the course of business and can take benefit of the margin scheme of Rule 32(5) of the GST Rules.

However, this view seems very aggressive as Rule 32(5) clearly states that the person shall be a dealer in buying and selling second-hand goods. A single transaction should not be used as the basis for determining whether a person is engaged in this activity.

Although, section 2(17)(c) definition as per CGST Act - “business” includes - any activity or transaction in the nature of trade, commerce, manufacture, profession, vocation, adventure, wager or any

other similar activity, whether or not it is for a pecuniary benefit; whether or not there is volume, frequency, continuity or regularity of such transaction;

Also as per a press release by CBIC dated 13 July 2017, even though the sale of old gold by an individual is for a consideration, it cannot be said to be in the course or furtherance of his business (as selling old gold jewellery is not the business of the said person), and hence does not qualify to be a supply per se.

The intention remains that where it is part of the business, even if it is a single transaction it would be leviable to GST.

Therefore, the author opines that the valuation benefit under Rule 32(5) should also be extended to the sale of second-hand vehicles by entities other than dealers. This view is based on the consideration of the industry's interests, harmonious reading of the GST law as any other interpretation would lead to absurd tax implications.

Conclusion-

EV vehicles must have the benefit of taxation on margin method and at the rate prescribed for EVs, i.e. 5%. Notification may be suitably amended to such effect. 

The government should address this issue, as electric vehicles (EVs) are relatively new to the market. In the future, the sales of EVs are expected to rise significantly, creating a substantial market opportunity for second hand EVs. At that time, the EV industry will likely anticipate similar benefits to those available for traditional vehicles. This would improve employee benefit plans, passenger transportation, and environmental sustainability initiatives.

Disclaimer –

The above information has been collated based on various articles written by our team and posted on various other platforms/websites. Authors view are personal and would not be liable for any actions taken. Contributors – CA Nitesh Nayak, Shashank T Anand (article), Narender Chowdhary (article) and Sudesh Padhi (article). Verification by CA Akshay Hiregange (Partner). For feedback write to [email protected]