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The recent tax reforms effective from September 22, 2025, have significantly streamlined and simplified GST rates on vehicles. In most cases, the separate compensation cess has been eliminated and incorporated into a single, unified rate. This move is intended to enhance transparency and lower the overall tax burden on consumers.
New GST rates on vehicles
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The GST rates for vehicles have been streamlined and rationalised by the recent tax reforms. For most vehicles, the separate compensation cess has been removed, and the tax is now levied under a single, simplified rate.
Given below is a table comparing the old and new GST and cess rates for each vehicle category.
Vehicle category Old GST and cess New GST and cess (Effective Sept 22, 2025) Electric vehicles 5% GST 5% GST (No change) Hydrogen fuel cell vehicles 12% GST 5% GST Three-wheeled vehicles 28% GST 18% GST Two wheelers up to 350cc engine 28% GST 18% GST Two wheelers with >350cc engine 28% GST + 3% Cess 40% GST (Cess merged into new rate) Passenger vehicles up to 4m in length and 1200cc (petrol/CNG) 28% GST + 1% Cess 18% GST (Cess removed) Passenger vehicles up to 4m in length and 1500cc (diesel) 28% GST + 3% Cess 18% GST (Cess removed) Passenger vehicles with engine of up to 1500cc 28% GST + 17% Cess 40% GST (Cess removed and merged into a new, single rate) Passenger vehicles with engine over 1500cc 28% GST + 20% Cess 40% GST (Cess removed and merged into a new, single rate) SUVs (above 4m length, over 1500cc engine, >170mm ground clearance) 28% GST + 22% Cess 40% GST (Cess removed and merged into a new, single rate) Hybrid passenger vehicles of up to 4m length 28% GST 18% GST Hybrid passenger vehicles of above 4m length 28% GST + 15% Cess 40% GST (Cess removed and merged into a new, single rate) Public transport vehicles (10-13 seaters) 28% GST + 15% Cess 18% GST Public transport vehicles with over 13 seaters and commercial goods vehicles 28% GST 18% GST
New GST rates on four-wheelers (Cars)
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Following the GST rate rationalisation implemented on September 22, 2025, tax rates on two-wheelers have been significantly adjusted based on engine capacity. This revision is intended to make mass-market scooters and motorcycles more accessible and affordable for consumers.
Below are the updated GST rates for two-wheelers in India:
Vehicle type Previous GST + cess Total tax rate (Old) New GST rate (Effective Sept 22, 2025) Total tax rate (New) Two-wheelers ≤ 350cc 28% GST + 0% Cess 28% 18% 18% Two-wheelers > 350cc 28% GST + 3% Cess 31% 40% 40% Electric two-wheelers 5% GST + 0% Cess 5% 5% 5%
New GST rate on three-wheelers
With the implementation of the GST rate rationalisation on September 22, 2025, tax rates on three-wheelers have been notably adjusted to enhance affordability for both passenger and commercial use.
Below are the updated GST rates for three-wheelers in India:
| Vehicle type | Previous GST + cess | Total tax rate (Old) | New GST rate (Effective Sept 22, 2025) | Total tax rate (New) |
| Conventional three-wheelers (Petrol, CNG, Diesel) | 28% GST + 0% cess | 28% | 18% | 18% |
| Electric three-wheelers | 5% GST + 0% cess | 5% | 5% | 5% |
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How is GST calculated on vehicles
The GST applicable on vehicles is calculated based on the ex-showroom price of the vehicle. This price includes the manufacturing cost, profit margins, and logistics but excludes the registration and insurance fees. The total GST amount is computed as a mix of the GST rate and a compensation cess, as applicable. It is important to check then GST state code applicable to your location to determine the exact tax rate for your vehicle purchase.
- Base price calculation: The ex-showroom price serves as the base for applying the GST and cess rates.
- GST rate application: GST is applied depending on the vehicle type and specifications. For example, smaller passenger vehicles now attract an 18% GST, while SUVs and luxury vehicles have a single 40% GST.
- Compensation cess addition: For certain vehicles such as SUVs and large passenger vehicles, a compensation cess is usually added to the applicable GST rate.
It is recommended that you use a GST calculator for an accurate calculation of the applicable GST rate.
Input tax credit (ITC) on vehicles
Under the current GST regime, businesses can claim an input tax credit or ITC on vehicle purchases, subject to the below conditions:
- Eligibility for commercial use: ITC on vehicles is primarily available for businesses purchasing vehicles for commercial use, such as for transport services or goods transportation. To understand the documents required for GST registration, ensure you have the necessary paperwork to claim ITC effectively.
- Passenger vehicles limitation: For passenger vehicles, ITC can only be claimed if the vehicle is used for specific commercial activities such as renting, leasing, or providing driver training services.
- Documentation: Proper documentation, such as the tax invoice, GSTIN number, and PAN details, among others, is necessary to claim ITC seamlessly.
GST impact on vehicle leasing and financing
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The GST rates play a significant role in vehicle leasing and financing. The introduction of simplified rates has also streamlined taxation on these services.
- Leasing services: GST applies to the leasing service itself. The rate usually aligns with the GST applicable to the specific vehicle category. With reduced rates on many vehicle types, the GST on lease payments may also go down.
- Financing options: GST is not charged on the loan amount, but may apply to related services such as processing fees and interest.
- Long-term cost efficiency: Leasing is an efficient option for businesses wanting to claim ITC and reduce the full tax burden of ownership. The simplified GST rates further enhance this advantage by making tax liabilities clearer.
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Conclusion
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GST has significantly simplified vehicle taxation in India, offering greater clarity on applicable taxes and the process of claiming tax credits for business use. The reforms have streamlined the structure, making many vehicles more affordable for both consumers and businesses. While personal vehicle buyers pay GST without access to input tax credits, businesses can reclaim part of these taxes through ITC. For those exploring vehicle financing, understanding GST’s impact is essential. The simplified structure not only supports better financial planning but also strengthens a business’s financial profile, improving eligibility for securing a business loan to fund future vehicle acquisitions.
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Frequently Asked Questions
Overview
How much is the GST on vehicles?
GST on vehicles is divided into three slabs: 5%, 18%, and 40%, depending on type, size, and engine capacity. Electric vehicles are charged 5%, most small cars and buses fall under 18%, and luxury cars or SUVs attract 40%. The cess is now included in these rates.
How much is the GST on a two-wheeler car?
The term “two-wheeler car” is incorrect. For two-wheelers, GST is 18% for engine capacity up to 350cc, and 40% for engines above 350cc.
Can we take GST input tax credit on vehicles?
Yes, Input Tax Credit (ITC) is available for vehicles used commercially, such as for goods or passenger transport, rentals, leasing, or driver training. ITC cannot be claimed for personal-use vehicles.
Is GST applicable on the sale of second-hand vehicles?
Yes, if the seller is a GST-registered dealer. GST is charged at 18% on the profit margin under the Margin Scheme, not on the full sale price. Private sales between individuals are exempt from GST.
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