What Is the Total Tax Burden for Car Owners in India?

Purchasing and maintaining a car in India involves several layers of direct and indirect taxes, significantly increasing the overall cost of ownership. In this post, we’ll break down the taxes borne by a car owner for both traditional and electric vehicles (EVs), assuming the cost of a traditional car is ₹700,000 and an electric vehicle is ₹15,00,000 (both exclusive of overheads and taxes).

1. Taxes During Purchase

When you purchase a car in India, the following taxes apply:

Goods and Services Tax (GST):
- Traditional Vehicles: GST rate is 28%.
  - Calculation for ₹700,000: ₹700,000 x 28% = ₹1,96,000
- Electric Vehicles: GST rate is reduced to 5%.
  - Calculation for ₹15,00,000: ₹15,00,000 x 5% = ₹75,000
Compensation Cess:
- Traditional Vehicles: Additional cess of 3% is assumed for mid-sized cars.
  - Calculation for ₹700,000: ₹700,000 x 3% = ₹21,000
- Electric Vehicles: No compensation cess is applicable.
Registration Fees and Road Tax:
- Traditional Vehicles: Registration fees vary by state and average around 10%.
  - Calculation for ₹700,000: ₹700,000 x 10% = ₹70,000
- Electric Vehicles: Many states offer exemptions or reduced road taxes for EVs. Assuming a nominal fee of 5%:
  - Calculation for ₹15,00,000: ₹15,00,000 x 5% = ₹75,000
Insurance Premium (Indirect Tax Component):
- Traditional Vehicles: Insurance attracts 18% GST. For an insurance premium of ₹25,000:
  - ₹25,000 x 18% = ₹4,500
- Electric Vehicles: Higher premiums are common for EVs due to their value, assuming ₹40,000:
  - ₹40,000 x 18% = ₹7,200
Other Overheads:
- Handling and logistics fees attract 18% GST.
  - Traditional Vehicles: ₹5,000 x 18% = ₹900
  - Electric Vehicles: ₹5,000 x 18% = ₹900
Income Tax Contribution (Indirect Impact): Before purchasing a car, an individual pays income tax on their earnings. Assuming a taxable income sufficient to purchase the car, an average 20% income tax rate is considered. For traditional vehicles and EVs:
- Traditional Vehicles: For a pre-tax income of ₹10,00,000 required to afford a ₹7,00,000 car, income tax = ₹10,00,000 x 20% = ₹2,00,000.
- Electric Vehicles: For a pre-tax income of ₹20,00,000 required to afford a ₹15,00,000 car, income tax = ₹20,00,000 x 20% = ₹4,00,000.

2. Taxes During Ownership

Fuel Taxes vs. Electricity Charges:
- Traditional Vehicles: Taxes form 50-60% of petrol/diesel prices. For ₹100/liter fuel cost and 12,000 km annual driving at 15 km/l mileage:
  - Annual fuel consumption = 12,000 / 15 = 800 liters
  - Annual tax component = 800 x ₹50 = ₹40,000
- Electric Vehicles: Electricity tariffs include taxes (~10%). Assuming 15 kWh/100 km efficiency and ₹7/kWh tariff:
  - Annual electricity consumption = 12,000 / 100 x 15 = 1,800 kWh
  - Annual tax component = 1,800 x ₹7 x 10% = ₹1,260
Service and Maintenance Taxes:
- Traditional Vehicles: GST on servicing is 18%. If annual servicing costs ₹10,000:
  - ₹10,000 x 18% = ₹1,800
- Electric Vehicles: Lower maintenance costs; assuming ₹5,000 annually:
  - ₹5,000 x 18% = ₹900
Renewal of Insurance:
- Traditional Vehicles: Insurance renewal costs ₹15,000 with 18% GST:
  - ₹15,000 x 18% = ₹2,700
- Electric Vehicles: Renewal costs ₹25,000 with 18% GST:
  - ₹25,000 x 18% = ₹4,500

3. Total Tax Burden Comparison

Let’s calculate the approximate total tax burden, including both direct and indirect taxes, for both vehicle types:

During Purchase:

Traditional Vehicle:
- GST: ₹1,96,000
- Compensation Cess: ₹21,000
- Registration: ₹70,000
- GST on Insurance: ₹4,500
- GST on Dealer Fees: ₹900
- Income Tax Contribution: ₹2,00,000
- Subtotal: ₹4,92,400
Electric Vehicle:
- GST: ₹75,000
- Compensation Cess: ₹0
- Registration: ₹75,000
- GST on Insurance: ₹7,200
- GST on Dealer Fees: ₹900
- Income Tax Contribution: ₹4,00,000
- Subtotal: ₹6,58,100

During Ownership (Annual):

Traditional Vehicle:
- Fuel Taxes: ₹40,000
- GST on Servicing: ₹1,800
- GST on Insurance Renewal: ₹2,700
- Subtotal: ₹44,500
Electric Vehicle:
- Electricity Taxes: ₹1,260
- GST on Servicing: ₹900
- GST on Insurance Renewal: ₹4,500
- Subtotal: ₹6,660

4. Five-Year Tax Estimate

If you own the car for five years, the total taxes paid would be:

Traditional Vehicle:
- Purchase Taxes: ₹4,92,400
- Ownership Taxes: ₹44,500 x 5 = ₹2,22,500
- Total: ₹4,92,400 + ₹2,22,500 = ₹7,14,900
Electric Vehicle:
- Purchase Taxes: ₹6,58,100
- Ownership Taxes: ₹6,660 x 5 = ₹33,300
- Total: ₹6,58,100 + ₹33,300 = ₹6,91,400

Conclusion

For a traditional car costing ₹700,000, the total tax burden over five years amounts to ₹7,14,900, whereas for an electric vehicle costing ₹15,00,000, the total tax burden is slightly lower at ₹6,91,400. While EVs enjoy reduced GST rates and exemptions on operational taxes, the higher initial income tax contribution due to their higher purchase cost narrows the tax burden gap. Prospective buyers should weigh these factors alongside the environmental and long-term financial benefits of EVs when making their decision.

FAQs

What is the GST rate on traditional cars and electric vehicles?
- The GST rate on traditional cars is 28%, while for electric vehicles, it is significantly lower at 5%.
Why is income tax considered in the total tax burden?
- Income tax is included because individuals pay tax on their earnings before using their net income to purchase a vehicle, contributing indirectly to the overall tax burden.
Are there any exemptions on road tax for electric vehicles?
- Yes, many states in India offer partial or complete exemptions on road tax for electric vehicles to promote eco-friendly transportation.
How do fuel taxes compare with electricity taxes for vehicle ownership?
- Fuel taxes form around 50-60% of petrol/diesel costs, while electricity taxes for charging electric vehicles are approximately 10% of the tariff.
What are the long-term financial benefits of owning an electric vehicle?
- Electric vehicles have lower operational taxes, reduced servicing costs, and are exempt from compensation cess, leading to significant savings over the years.