Looking for expert help with Income tax and GST for car showroom dealers India? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
Key Takeaways
- Small cars (petrol, LPG or CNG up to 1200 cc, diesel up to 1500 cc, and no longer than 4000 mm) are 18% Goods and Services Tax (GST). Other cars are 40% with no compensation cess. Electric cars are 5% (Notification 9/2025-Central Tax (Rate), from 22 September 2025).
- You can claim input tax credit (ITC) on demo cars when you buy and sell cars on your own account (CBIC Circular 231/25/2024-GST). When you later sell a demo car, you pay the higher of GST on the price and the reduced ITC.
- Collect 1% Tax Collected at Source (TCS) when one car is sold for more than Rs 10 lakh (Section 206C(1F)). The 0.1% TCS on sale of goods ended on 1 April 2025.
- Don't take Rs 2 lakh or more in cash for one car, even split across days. The penalty equals the cash received (Sections 269ST and 271DA).
- Most showrooms need full books, and a tax audit above Rs 1 crore of turnover, or Rs 10 crore if cash stays within 5%.
What is the GST rate on cars in India after GST 2.0? Petrol, LPG and CNG cars up to 1200 cc and diesel cars up to 1500 cc, no longer than 4000 mm, attract 18% GST. All other passenger cars attract 40%, and compensation cess no longer applies. Electric cars are 5%. These rates apply from 22 September 2025 under Notification 9/2025-Central Tax (Rate).
A car showroom moves more money per customer than almost any other retail business. One sale can run into lakhs, the GST rate depends on two measurements, and part of the price often comes in as cash. GST 2.0 changed the rate on almost every car on your floor. CBIC has also settled the long argument over demo cars. This guide covers the rates you'll bill, the ITC rules for demo vehicles, TCS and cash limits, and how your income tax works for AY 2026-27.
Which GST rate applies to each car?
Two things decide it: fuel type with engine capacity, and length. Both must be within the limit for 18%. Miss either one and the car is 40%.
Comparison
GST Rates for a Car Showroom (from 22 September 2025)
| Item | HSN | GST rate |
|---|---|---|
| Petrol, LPG or CNG car up to 1200 cc and up to 4000 mm | 8703 | 18% |
| Diesel car up to 1500 cc and up to 4000 mm | 8703 31 | 18% |
| Hybrid car within the same engine and length limits | 8703 40/50/60/70 | 18% |
| All other cars, SUVs and MUVs (including larger hybrids) | 8703 | 40% |
| Electric cars (run solely on electricity) | 87 | 5% |
| Chargers for electric vehicles | 8504 | 5% |
| Three-wheeled vehicles | 8703 | 18% |
| Goods vehicles (pick-ups, light commercial vehicles) | 8704 | 18% |
| Car parts and accessories | 8708 | 18% |
| Tyres for cars | 4011 | 18% |
Source: Notification 9/2025-Central Tax (Rate): Schedule I S. No. 438, 441; Schedule II S. No. 137, 534, 535, 537, 538, 539, 540, 544; Schedule III S. No. 5, 6, 7
The notification says engine capacity and length are taken as per the Motor Vehicles Act, 1988 and its rules. Use the figures from the homologation and registration documents, not the brochure. Set the rate once per variant in your billing software, because two variants of the same model can fall on different sides of the line.
Watch the petrol cars between 1200 cc and 1500 cc. The official FAQs describe 40% cars as those "exceeding 1500 cc or length exceeding 4000mm", which can make it sound as if a 1497 cc petrol car under 4 metres is 18%. It isn't. The notification limits 18% to petrol, LPG and CNG cars up to 1200 cc, so that car is 40% (Schedule III, S. No. 5).
Compensation cess is gone for cars. Mid-size and large cars used to carry 28% GST plus cess. The official FAQs on the 56th GST Council meeting confirm the new rate is 40% "with no compensation cess", so your invoice shows GST only.
What does the GST look like on a real sale?
A compact petrol hatchback (1197 cc, 3995 mm). You buy it from the manufacturer for Rs 6,20,000 plus Rs 1,11,600 GST at 18%. You sell it for Rs 6,50,000 plus Rs 1,17,000 GST, so the ex-showroom price is Rs 7,67,000. After setting off the Rs 1,11,600 ITC, you pay Rs 5,400 in cash.
A petrol SUV (1497 cc, 4300 mm). It's over both the petrol engine limit and the length limit, so it's 40%. On a selling price of Rs 12,00,000, GST is Rs 4,80,000 (Rs 2,40,000 CGST and Rs 2,40,000 SGST within your state), and the ex-showroom price is Rs 16,80,000. The car sells for more than Rs 10 lakh, so you also collect 1% TCS (see below).
Registration fees and road tax you pay to the Regional Transport Office (RTO) for the customer can stay out of your taxable value. To do that, you must pay them as the customer's pure agent, show them separately on the invoice, and recover only the actual amount (Rule 33, CGST Rules). Any "handling" or "logistics" charge you keep is your own income. Tax it with the car.
If your aggregate turnover crossed Rs 5 crore in any year from 2017-18, invoices to GST-registered buyers (companies, fleet operators, any buyer with a GSTIN) need an e-invoice with an Invoice Reference Number. Notification 10/2023-Central Tax brought this limit into force from 1 August 2023. Most authorised car showrooms are above it.
Can you claim ITC on demo cars?
Yes, in most cases. Section 17(5)(a) of the CGST Act blocks ITC on cars that seat up to 13 people, except when they're used for "further supply of such motor vehicles". CBIC Circular 231/25/2024-GST (10 September 2024) says a demo car helps you sell similar cars, so it counts as being used for further supply. The credit isn't blocked.
The circular also covers the cases that trip dealers up:
- Capitalised demo cars. Showing the demo car as a fixed asset doesn't take away the ITC. But if you claim income tax depreciation on the GST part of its cost, you can't also take ITC on that GST (Section 16(3), CGST Act). Pick one.
- Agency model. If the manufacturer bills the customer directly and you only provide marketing or test-drive services, you aren't supplying cars on your own account. ITC on the demo car isn't available.
- Staff and management cars. A car used to move staff isn't used for further supply of cars. Its ITC stays blocked.
How much GST do you pay when you sell a demo car?
When the demo period ends and you sell a capitalised demo car, Section 18(6) of the CGST Act applies. You pay the higher of:
- GST on the sale price, or
- the ITC you took on the car, reduced by 5 percentage points for every quarter or part of a quarter since the date of the purchase invoice (Rule 40(2), CGST Rules).
Example. You bought a small demo car on 15 October 2025 for Rs 7,00,000 plus Rs 1,26,000 GST at 18% and took the full ITC. You sell it on 10 October 2026, within 4 quarters of the invoice, for Rs 5,50,000.
- GST on the sale price: 18% of Rs 5,50,000 = Rs 99,000
- Reduced ITC: Rs 1,26,000 less 20 percentage points (4 quarters x 5) = 80% of Rs 1,26,000 = Rs 1,00,800
- You pay Rs 1,00,800, the higher figure.
Where the reduced ITC is higher, it forms part of your output tax and you report it in GSTR-1 (Rule 44(6), CGST Rules). A demo car sold at a low written-down value often ends up in this position, so work out both figures before you quote the customer.
Used cars you buy from customers (exchange vehicles) are different. If you claim no ITC on them, the margin scheme in Rule 32(5) lets you pay GST only on the difference between selling and purchase price. See our GST margin scheme guide for used cars.
Do you collect TCS, and what about cash?
TCS on cars above Rs 10 lakh. Section 206C(1F) requires a seller to collect TCS at 1% of the sale value when a single motor vehicle is sold for more than Rs 10 lakh. The limit is per vehicle, not your yearly total, so most SUVs and premium sedans are covered. Deposit the TCS and file the quarterly TCS return. Our TCS guide has the steps.
TCS on sale of goods has ended. The 0.1% TCS under Section 206C(1H) on receipts above Rs 50 lakh a year from one buyer stopped from 1 April 2025 (Finance Act 2025). If your billing software still adds it on fleet or corporate sales, switch it off.
Cash limit. Section 269ST of the Income-tax Act 1961 bars receiving Rs 2 lakh or more in cash from one person in a day, for a single transaction, or for one event. Say a customer buying a Rs 7,67,000 hatchback pays Rs 1,50,000 cash on the booking day and Rs 1,20,000 cash at delivery, with the rest financed. Neither day crosses Rs 2 lakh, but both payments are for the same car: Rs 2,70,000 in cash for one transaction. The penalty under Section 271DA can be Rs 2,70,000, the full amount. Take anything above Rs 1,99,999 per car by bank transfer, UPI, card or account payee cheque. Our cash transaction limits guide covers the related rules.
The Income-tax Act 2025 replaces the 1961 Act from 1 April 2026 with new section numbers. Confirm the current references with your CA for FY 2026-27 sales.
Step-by-Step Guide
Before You Hand Over the Keys
Check fuel, cc and length
18% only if petrol, LPG or CNG up to 1200 cc, or diesel up to 1500 cc, and length up to 4000 mm. Electric-only is 5%. Everything else is 40%.
Split the bill
Car, accessories and extended warranty on their own lines. Show RTO fees and road tax paid as the customer's agent separately, at actual cost.
Count the cash
Total cash for this car must stay below Rs 2 lakh across booking, delivery and every instalment (Section 269ST).
Price above Rs 10 lakh?
Collect 1% TCS under Section 206C(1F).
Business buyer?
Take their GSTIN and generate an e-invoice if your turnover has crossed Rs 5 crore in any year since 2017-18.
Source: Notification 9/2025-Central Tax (Rate); Rule 33, CGST Rules; Notification 10/2023-Central Tax; Sections 269ST and 206C(1F), Income-tax Act 1961
How is a car showroom's income taxed for AY 2026-27?
Section 44AD lets a resident individual, HUF or partnership firm (not an LLP or company) declare a deemed profit on turnover up to Rs 2 crore, or Rs 3 crore where cash receipts are within 5% of total receipts. Forty hatchbacks at Rs 7.67 lakh already make about Rs 3.07 crore. So a car showroom keeps full books of account and pays tax on actual profit.
Whether you also need a tax audit depends on your cash mix (Section 44AB(a), Income-tax Act 1961):
- turnover above Rs 1 crore: audit required
- turnover up to Rs 10 crore, with cash receipts within 5% of total receipts and cash payments within 5% of total payments: no audit
- turnover above Rs 10 crore: audit required
A showroom selling 15 cars a month at Rs 8 lakh has turnover of about Rs 14.4 crore before service and accessories. That's above Rs 10 crore, so the audit applies whatever the cash mix. See our tax audit section 44AB thresholds guide.
Example (partnership firm). A firm running a showroom has taxable business income of Rs 40,00,000 after partner salary and interest within the Section 40(b) limits. A firm pays a flat 30%, so tax is Rs 12,00,000. Add 4% cess of Rs 48,000. Income is under Rs 1 crore, so there's no surcharge. Tax payable: Rs 12,48,000.
Commission from banks, finance companies and insurers for loans and policies you arrange is business income. They'll usually deduct TDS on it. Match those credits with your Form 26AS and Annual Information Statement (AIS) before filing. A proprietor filing on books uses ITR-3, a partnership firm ITR-5 and a company ITR-6.
Common mistakes car dealers make
- Billing a 1.5 litre petrol compact at 18%. The 18% petrol limit is 1200 cc. A 1497 cc petrol car is 40% even if it's under 4 metres.
- Claiming ITC on demo cars under an agency model, or on staff cars. Circular 231/25/2024-GST denies credit in both cases.
- Taking ITC and depreciation on the same GST. Section 16(3) of the CGST Act allows one, not both.
- Charging GST only on the price when selling a demo car. Compare it with the reduced ITC under Section 18(6) and pay the higher figure.
- Splitting cash between booking and delivery. Section 269ST counts the whole car as one transaction.
How Tax Garden helps car dealers
We map every variant to its GST rate, report vehicle, accessory and service sales correctly in GSTR-1 and GSTR-3B, and track ITC on demo cars, including the GST payable when you sell them. See our GST return filing service. We keep your books, coordinate the tax audit and file your ITR; see our accounting and bookkeeping service, ITR filing service and pricing. For rates on every vehicle type, see our GST on cars and vehicles guide.
