Analysis of Council’s Proposal on Electronic Vehicles

Introduction

The Ministry of Road Transport and Highways (MoRTH) recently permitted the registration and sale of electric vehicles without pre-installed batteries. This action was taken to “decouple the cost of the battery (30-40% of the total cost) from the cost of the vehicle,” which provided the EV ecosystem a boost. This legislative decision is intended to cut the initial price of electric two and three-wheelers, which might later be made available independently by energy service providers or OEMs, so boosting sales. Regarding tax policy, no exceptions have been made. The government has assured the extension of tax breaks for the EV sector.

Cause Of Concern

Previously, “Electrically Operated Vehicles” were subject to a 12% GST charge. The rate was cut to 5% in August 2019, under Notification No.1/2017-Integrated Tax (Rate) issued June 28, 2017. At first glance, it is clear that the 5% rate entrance applies to all “electrically driven vehicles, including two- and three-wheeled electric vehicles.” The Explanation attached to the entry expands on the definition of “Electrically operated vehicles.”

Electrical Vehicle

[Image Sources : Shutterstock]

This Explanation is dependent on numerous legal interpretations. By specifying that “Electrically operated cars” refers to vehicles that function purely via electrical energy received from one or more electrical batteries or an external source, there was uncertainty with respect to whether EVs marketed without pre-installed batteries might fall under this definition. Several EV manufacturers and industry organisations contacted the government requesting clarification on the matter. Because of this remaining ambiguity, numerous taxpayers contacted Advance Ruling Authorities around the nation, asking whether EVs sold without battery packs were subject to a 5% GST rate. Different State Authorities ultimately issued contradictory decisions.         

In the case of M/s. Anjali Enterprises, it was determined that EVs provided with or without batteries qualify as “electrically operated vehicles” and are subject to a 5% GST charge.

In the case of M/s. Hooghly Motors, it was determined that an EV without batteries does not qualify as a “electrically operated vehicle,” and so the 5% GST rate would not be applicable.

Contrary Views

Rule 2(a) of the General Interpretative Rules (GIR) states that an incomplete object that possesses the basic characteristics of a complete article should be categorized as the completed article. If this is applied to the given situation, it is possible to conclude that an EV that is complete in all ways save for its battery has the characteristics of an EV. Consequently, these EVs which do not have batteries will likewise be classified as complete EVs. As a result, it will fall within the ambit and scope of S. No. 242A. This interpretation is bolstered by the HSN Explanatory Notes, which state that a vehicle without a battery can be treated as a fully-assembled vehicle for purposes of Rule 2. (a).

Alternatively, an opposing viewpoint is also available. While EVs without batteries can qualify as complete EVs for classification purposes, the explicit description of the items in S. No. 242 will only apply to battery-equipped EVs. This viewpoint is predicated on the concept that GIRs can only aid in classification to the extent that they do not contradict the description of the items provided in the GST Rate Entry. In the case of Jain Engineering Co., the Supreme Court ruled that the description of products will take precedence over the Customs Tariff headings.

Conclusion

In its 47th meeting, the GST Council recommended that a clarification should be issued that – Electric vehicles, regardless of whether or not they are fitted with a battery pack, will come under the concessional GST rate of 5%. This recommendation was made in consideration of the interpretational issues that were involved as well as the uncertainty over the correct legal position. This step is very much appreciated as it falls in keeping with the government’s overall attitude toward the promotion of EVs. The electric vehicle sector is keeping its fingers crossed that this clarification will be put into effect retroactively.

Author: Ishika Chaubey, A Student of Symbiosis Law School, Pune, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References

CASES

M/s. Anjali Enterprises, 2019 SCC ONLINE P&H 1720.

HOOGHLY MOTORS PVT LTD., 2020 SCC ONLINE WB AAR GST 8.

Jain Engineering Company vs Collector Of Customs, 1991 ECR 271 Tri Delhi.

ARTICLES

Tax-Free or Attract 18% GST Rate on EV Charging Stations, Clear Tax (Nov. 7, 2022, 6:44PM), https://cleartax.in/s/gst-on-ev.

Press Information Bureau Government of India Ministry of Finance, https://pib.gov.in/Pressreleaseshare.aspx?PRID=1838020 (last visited 29 JUN 2022 6:10PM).

Rohan Muralidharan, Council’s Proposal On EV Space – A Great Business Promise, Taxsutra (Nov. 8, 2022, 11:11 AM), file:///C:/Users/Admin/Downloads/Council%E2%80%99s%20Proposal%20On%20EV%20Space%20%E2%80%93%20A%20Great%20Business%20Promise%20(1).pdf.

47th GST Council Meeting: Clarification on GST rate, A2Z TaxCorp LLP (Nov. 9, 2022, 3:33 PM), https://www.a2ztaxcorp.com/47th-gst-council-meeting-clarification-on-gst-rate/.

Saur Energy International, https://www.saurenergy.com/ev-storage/ev-batteries-in-5-gst-bracket-to-support-faster-adoption (last visited July 5, 2022).

NOTIFICATION

Notification No. 1/2017-Central Tax (Rate) dated 30 June 2017

 

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