1. Introduction
With the ever-increasing fuel costs which are surging all-time high, automobile manufacturers as well as people are shifting towards electric vehicles. The market for the electric vehicle is in great demand and will soon become the next big thing once it is fully tapped. The electric vehicle with its environment friendly attributes is slowly and gradually changing the landscape of automobile sector.
In order to promote electric vehicles in the country, the Government has proposed some initiatives, incentives and exemptions so as to ease the manufacturing process and bring down the cost of manufacturing electric vehicle. On the GST front, the GST rate of electric vehicles was reduced from 12% to 5% w.e.f. 1-8-2019.
2. Allowance of Sale of Electric two/three wheelers without battery
The main and important component of electric vehicle is ‘battery’ without which such vehicles cannot run and operate. However, batteries were proving to be quite expensive thereby increasing the overall cost of electric vehicle. To de-link the cost of battery from the vehicle, the Ministry of Road Transport and Highways (MoRTH) vide its Press Release dated 12-08-2020 allowed the registration and sale of electrical two wheelers and three-wheeler in the market without pre-fitted batteries. Further, the press release stated that the battery could be provided separately by the OEM or the energy service provider.
3. Taxability of electric vehicles under GST
- Schedule I of Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017, notifies rate of goods at 5% GST. Sr. No. 242A (inserted w.e.f. 1-8-2019) of the said schedule, provides GST rate on electric vehicles classifiable under Heading No. 87 of the Customs Tariff Act, 1975, the relevant extract is reproduced below:
Electrically operated vehicles, including two and three wheeled electric vehicles.
Explanation—For the purposes of this entry, “Electrically operated vehicles” means vehicles which are run solely on electrical energy derived from an external source or from one or more electrical batteries fitted to such road vehicles and shall include E- bicycles.
- Chapter 87 covers ‘Vehicles other than Railway or Tramway Rolling-Stock, and Parts and Accessories Thereof’. Heading 8703 covers Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 8702), including station wagons and racing cars. Electric vehicles covered under Heading 8703 attract 5% GST. While Heading 8706 covers chassis fitted with engines, for the motor vehicles of headings 8701 to 8705, taxed at the rate of 28% GST.
- As per Press Release issued after 36th Council Meeting was held on 27-07-2019, it was stated that GST rate on all electric vehicles to be reduced from 12% to 5%.
- On the perusal of the Minutes of the 36th Council Meeting (Para 10.28), it was suggested that tax rate incentive for vehicle costing more than Rs. 15 lakhs along with other electric vehicles might be avoided. However, the Secretary responded that the proposal before the Council was not based on the cost of electric vehicle and if the rate was reduced, benefit would be available to all the electric vehicles.
4. Contrary Advance Rulings
Ever since the Govt. allowed the sale of electric two/three wheelers without battery, there has been a lot of confusion that whether such vehicles without battery would still be classified as electrically operated vehicles and whether those can be taxed at the rate of 5% GST.
This issue was taken up by the West Bengal AAR as well as Odisha AAR but both the AARs’ pronounced contrary rulings as stated below:
- In the case of M/s Hooghly Motors Pvt Ltd., West Bengal AAR vide order no. 06/WBAAR/2020-21 dated 10-08-2020, observed that a three-wheeled motor vehicle without the battery pack does not have the essential character of an ‘electrically operated vehicle’. However, it is neither a vehicle fitted with an internal combustion engine. Unless it is equipped with any device like solar panels that may supply energy for its locomotion, it is not classifiable as a vehicle under Sub-heading 8703 of the Tariff Act. However, it includes the chassis fitted with the motor to convert electrical energy into the mechanical energy to put the vehicle into locomotion once the battery pack is attached. Such a device is called the engine of the vehicle. It is, therefore, classifiable under Tariff-head 8706 00 31, being the chassis fitted with an engine of a vehicle under sub-heading 8703. In view of the above, it was ruled that a three-wheeled motor vehicle is classifiable under HSN 8703 as an electrically operated vehicle, provided it is fitted with the battery pack. Otherwise, it will be classifiable under HSN 8706.
- AAR ODISHA in the case of Anjali Enterprises vide 01/ODISHA-AAR/2021-22 dated 15-04-2021, addressed the issue of taxability of electric vehicles without battery pack under GST. AAR observed that an electric vehicle with battery pack uses electric motors and motor controllers instead of internal combustion engines (ICEs) for propulsion. It derives all power from battery packs and thus, has no internal combustion engine etc. Electrically operated vehicles are designed to run only on electrical energy. As such, they will run on battery as and when put to use. Hence, for vehicles to be classified as electrically operated vehicles, it must be such that it would run solely on electrical energy derived from one or more electrical batteries, as and when put to use. AAR referred the judgment passed by the Department of Revenue- Revisionary Authority in the case of Reva Electric Car Company Pvt. Ltd. reported in [2012 (275) E.L.T. 488 (G.O.I.)], which ruled that if electrically battery operated cars are exported, though not fitted with batteries at the time of export, the same is still classifiable ‘battery powered road vehicles’ and would run on battery when put to use. Hence, we hold that fitting of battery in the vehicle, at or before the time of supply, is not a precondition for the same to be classified as electrically operated vehicle. Thus, it was held that a two or three-wheeled “battery powered electric vehicle” when supplied with or without battery pack is classifiable under HSN 8703 as an ‘electrically operated vehicle’ and is taxable at 5% GST.
5. Discussion
According to the Notification No. 1/2017-Central Tax (Rate), electric vehicle means vehicles which are either run on energy obtained from external source or where one or more electrical batteries are fitted to such road vehicles.
This fact cannot be denied that battery pack plays a crucial role in the operation of electric vehicle. Notably, battery pack can be installed afterwards, and thereafter, electric vehicle can be put to use and become operational.
As mentioned above, there are contrary advance rulings on this issue, WB AAR holds that electric vehicle without battery is nothing but chassis with engine and cannot be classified as electric vehicle whereas Odisha AAR holds that electric vehicle either with or without battery pack would still qualify as ‘electrically operated vehicle’ under GST.
The automobile industry performance in terms of sales revenue has not been impressive in the past few years. The intention of the Government to reduce the GST rate of electric vehicles was to boost this emerging sector and that is why no differentiation or threshold was placed with respect to cost of electric vehicles and the reduced rate of 5% is applicable on all the electric vehicles.
However, there is no clarification on whether the electric vehicle without battery would still be classified as ‘electric vehicle’ or not for the purpose of taxability at 5% GST.
6. Concluding Remarks
In the absence of any clear-cut clarification from the Govt., some dealers and manufacturers are taking a safe measure by charging 28% GST. If the dealers and manufacturers opt for 5% GST on the electric vehicles sold without battery, then the litigation may arise in future. Thus, there is a dire need from the Govt. to clear the dust regarding the taxability of electric vehicles sold without battery under GST as early as possible to avoid further disputes and litigations on the same.
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