GST Council Vehicle Tax Overhaul — ITC on Cars and EV Fleet Parity Explained

A Reform That Touches Every Business That Runs Cars

The 57th meeting of the GST Council on 7 October is expected to consider a package of transport and logistics proposals that could reshape how businesses are taxed on the vehicles they buy, lease and run. The centrepiece is a proposal to allow input tax credit (ITC) on passenger motor vehicles with a seating capacity of up to 13 persons, including the driver, and on their running costs. It is a change with wide reach, because it touches corporate fleets, logistics providers, professional firms and anyone whose business depends on moving people.

At present, ITC is blocked for general businesses on such vehicles under Section 17(5) of the CGST Act, unless the vehicles are used for specified activities like resale, passenger transport or driving training. The restriction is based on seating capacity and vehicle classification and makes no exception for engine type, which is why electric vehicles up to 13 seats are blocked in exactly the same way as conventional ones.

What Is Proposed

The proposal seeks to widen the circumstances in which businesses can claim credit, extending it not just to the vehicle purchase but to insurance, servicing, repairs and maintenance, and to the leasing, renting and hiring of vehicles. Under current rules, credit on these running costs is also restricted. If approved, the change would expand ITC availability well beyond the vehicle itself, offering relief to corporate fleets and professional firms.

EV Fleet Parity

Separately, the Council is expected to consider bringing EV-based passenger transport and vehicle rental services under the same tax framework that applies to conventional vehicles, making the treatment technology-neutral. Under the proposal, operators providing vehicles with a driver could choose between paying GST at 5 per cent with restricted ITC, or 18 per cent with full eligible ITC. That 5 per cent and 18 per cent structure already exists for comparable services using conventional vehicles, and the change would simply extend it to EVs.

It is important not to misread this as a new 18 per cent option for fleet operators. The higher-rate route with full ITC is already available for ICE-based services. What the proposal does is remove the distinction between electric and conventional vehicles when they are used for the same commercial purpose. The GST rate on the vehicle itself is separate from the rate applicable to the service the operator supplies.

Wider Credit and Decriminalisation

The Council is also likely to examine widening ITC eligibility for several business expenses, including health and life insurance for employees, outdoor catering, telecommunication towers, pipelines laid outside factory premises, certain free samples, and goods destroyed after expiry where destruction is required under law. A separate proposal seeks to protect genuine buyers from losing ITC when a supplier further up the chain defaults, directing recovery towards the defaulting supplier instead.

On enforcement, the Council may consider removing the power to arrest under the GST law and rationalising e-way bill requirements, on the view that better invoice matching and data analytics have reduced the need for such provisions. GST rates themselves are expected to remain unchanged, preserving the two-rate structure introduced last year.

Other Credit Expansions on the Table

Beyond vehicles, the Council is expected to examine widening ITC eligibility for a range of business expenses that are currently blocked.

Why It Matters

Two things make this more than an accountant's story. First, unlocking ITC on vehicles and their running costs lowers the effective cost of operating a fleet, which can feed through to the economics of passenger transport, delivery services and employee commuting. Second, giving EVs the same tax options as conventional vehicles removes a quiet disadvantage that has made some fleet operators hesitant to go electric despite lower running costs. For the EV transition, tax neutrality in commercial use is as important as a purchase subsidy, because fleets buy on total cost of ownership over years.

There is also a cash-flow angle. A large number of goods in the 5 per cent bracket, including food, pharmaceuticals, textiles and electric vehicles, face an inverted duty structure where tax paid on inputs exceeds tax charged on the output, leaving ITC accumulated with businesses. Releasing that stuck capital could free up money for investment.

What This Means for You

If you run a business that operates cars or a fleet, the outcome of the 7 October meeting could lower your tax cost on both buying and running vehicles, and it could make going electric easier to justify on the books. If you are an individual buyer, the proposals do not change the price you pay, but the EV fleet parity move is a positive signal for the broader electric ecosystem. The proposals are not final and require the Council's approval. Compare models on our Compare page, review insurance options on our insurance page, and estimate EV running costs on the EV calculator.

(Sources: Financial Express, Moneycontrol, Business Standard, The Hindu BusinessLine, India Today. Image: EV charging station in Begumpet, Hyderabad by IM3847, Wikimedia Commons, CC BY-SA 4.0) Cover: cover-7-gst-vehicle-tax.jpg