GST Council Proposes 5% Tax Option for Passenger Transport and EV Rentals

The Goods and Services Tax (GST) Council had considered giving passenger-transport and vehicle-rental businesses a choice between a 5% GST rate with restricted input tax credit (ITC) and an 18% rate with full ITC. The proposal covered passenger motor vehicles with seating capacity of up to 13 people, including electric vehicles (EVs), and was aimed at simplifying the tax treatment of business fleets and transport operators.

However, the proposal should currently be treated as a reform under consideration rather than an approved change. Following the 57th GST Council meeting on October 8, the proposal to allow input tax credit on motor vehicles was deferred to the next meeting. The Council approved several other GST process reforms, including faster refunds, registration changes and enforcement reforms.

What Was the Proposed 5% GST Option?

Under the proposal discussed before the GST Council meeting, passenger-transport and vehicle-rental operators could choose between two tax structures.

The first option would impose 5% GST with restricted ITC, while the second would impose 18% GST with full ITC availability.

The proposed choice would apply to both conventional internal-combustion vehicles and electric vehicles. This was significant because the existing GST framework generally restricts ITC on passenger motor vehicles with seating capacity of up to 13 persons, subject to specified exceptions.

Proposed tax structure

Option	GST rate	ITC treatment
Option 1	5%	Restricted ITC
Option 2	18%	Full ITC
Vehicles covered	Up to 13 seats	Conventional and EVs
Status	Proposal	Deferred for further consideration

The proposed structure would allow businesses to choose the model that best fits their operating costs and tax-credit requirements.

Why the Proposal Matters for EVs

A key aspect of the proposal was that the tax treatment would not distinguish between electric and conventional vehicles for the relevant business use.

Under the existing rules, restrictions on ITC for passenger vehicles are based largely on vehicle classification and seating capacity rather than whether the vehicle is powered by electricity or an internal-combustion engine.

As a result, an electric vehicle with up to 13 seats could face the same ITC restrictions as a comparable petrol or diesel vehicle when used by a general business, subject to the exceptions already provided under GST law.

The proposed framework could therefore have created greater tax certainty for businesses operating EV fleets.

For fleet operators, the availability of ITC can materially affect the effective cost of purchasing, leasing and operating vehicles.

How the 5% and 18% Options Would Work

The proposed choice essentially involved a trade-off between a lower GST rate and greater access to tax credits.

Under the 5% option, the business would pay a lower rate but would have restricted ITC. This could be attractive to operators with relatively limited eligible input taxes.

Under the 18% option, the upfront GST liability would be higher, but the business would receive broader ITC availability.

This could be more suitable for operators with significant GST-bearing expenses and substantial input tax credits.

The flexibility would allow businesses to assess their own cost structures instead of being required to follow a single tax model.

ITC Could Cover More Than Vehicle Purchase

The proposal was broader than simply allowing credit on the purchase of passenger vehicles.

The government was considering expanding ITC treatment to other costs associated with passenger vehicles, including leasing, insurance, servicing and repairs.

This could have reduced the overall tax cost of operating corporate fleets and professional transport businesses.

For companies that operate large numbers of vehicles, recurring expenses can be substantial. Allowing eligible ITC on these costs could therefore have a greater financial impact over time than credit on the vehicle purchase alone.

Why Passenger Transport Businesses Could Benefit

Passenger transport operators typically have significant operating expenses.

These can include:

• Vehicle acquisition or leasing
• Insurance
• Repairs and servicing
• Fleet management
• Charging or fuel costs
• Spare parts
• Other business services

The proposed ITC changes could have reduced the amount of GST that ultimately becomes a cost for eligible businesses.

For operators with large fleets, the difference between restricted and full ITC could be significant.

The 5% option, meanwhile, could provide a simpler lower-rate structure for businesses that do not generate enough eligible input tax to make an 18% rate with full ITC more attractive.

Corporate Fleets Could Be Affected

The proposed changes were not limited to traditional taxi or bus operators.

Corporate fleets and professional businesses could also be affected if the final rules expand ITC eligibility for passenger vehicles used for business purposes.

Companies use passenger vehicles for employee transportation, customer visits, sales teams, field operations and other business activities.

The existing restrictions can increase the effective cost of operating such vehicles because GST paid on certain expenses cannot be fully offset against output tax.

A wider ITC framework could therefore change the economics of fleet ownership and leasing.

Proposal Covers Electric and Conventional Vehicles

The inclusion of both EVs and conventional vehicles is particularly important for businesses deciding how to transition their fleets.

The proposed framework would create broadly similar GST treatment based on the use and classification of the vehicle rather than giving a separate ITC regime solely because a vehicle is electric.

This would provide tax neutrality between different powertrains under the proposed structure.

At the same time, the absence of a separate GST incentive does not eliminate other government policies supporting EV adoption, including state-level incentives and other programmes.

What Happened at the October 8 GST Council Meeting?

The 57th GST Council meeting approved a broad package of process and compliance reforms.

However, the proposal concerning ITC on motor vehicles was not finalised.

Moneycontrol reported after the meeting that the motor-vehicle ITC proposal had been deferred to the next GST Council meeting. This means businesses cannot yet claim additional ITC on the basis of the proposed changes.

The deferral gives the government additional time to examine the financial and administrative implications of expanding ITC.

It also means the eventual framework could differ from the proposal discussed before the meeting.

GST Council Focuses on Broader Compliance Reform

The vehicle-ITC proposal was only one part of a much larger GST reform agenda.

The Council approved changes covering GST registration, refunds, enforcement, penalties and ITC in other areas.

Among the approved measures were faster refund processing, changes to GST registration and removal of GST officers’ arrest powers. The prosecution threshold was also raised from ₹1 crore to ₹5 crore.

The Council also approved several changes intended to reduce compliance costs and simplify the interaction between taxpayers and the GST administration.

Why ITC Is Important for Businesses

Input tax credit is one of the central features of the GST system.

Businesses can generally offset eligible GST paid on inputs and services against GST collected on their outward supplies. Restrictions on ITC can therefore increase the effective tax cost of business activities.

For transport companies, the availability of ITC can influence whether it is more economical to purchase, lease or operate vehicles under a particular tax structure.

The proposed 5% versus 18% choice was designed around this principle.

Instead of forcing all operators into one tax rate, businesses could potentially select the structure that works best for their individual input-credit position.

Impact on EV Fleet Economics

For EV fleet operators, tax treatment is becoming increasingly important as businesses consider electrification.

EVs generally involve different cost structures from conventional vehicles. Charging infrastructure, battery-related expenses, servicing requirements and financing costs can all affect the total cost of ownership.

A clear GST framework would help fleet operators calculate those costs more accurately.

The proposed reform could also have reduced uncertainty by applying similar ITC rules to electric and conventional passenger vehicles.

However, because the proposal has been deferred, operators will have to wait for the next Council decision before making tax-planning assumptions based on the proposed framework.

Potential Impact on Vehicle Rental Companies

Vehicle-rental companies could also be affected if the proposed framework is eventually approved.

Rental businesses may acquire vehicles directly or through leasing arrangements, creating GST costs at several points in their operations.

An 18% GST option with full ITC could allow eligible operators to offset more of those taxes.

Alternatively, businesses with lower input-tax exposure could prefer a 5% structure with restricted credit.

The choice could therefore make tax planning an important part of fleet-management decisions.

The Bigger Picture

The proposed 5% GST option highlights a broader issue within India’s indirect-tax system: a lower headline tax rate is not always equivalent to a lower overall tax cost for a business. The availability of input tax credit can be just as important as the rate itself.

For passenger transport and vehicle-rental operators, the proposed choice between 5% GST with restricted ITC and 18% with full ITC could have allowed businesses to select the structure that matched their operating models. But the October 8 deferral means the proposal remains unresolved.

The eventual decision will also matter for EV fleet operators. A clear and predictable tax framework could make it easier for businesses to compare electric and conventional fleets on their total cost of ownership rather than dealing with uncertainty over GST credits.

Looking Ahead

The GST Council is expected to revisit the motor-vehicle ITC proposal at its next meeting. Until then, businesses should continue to follow the existing GST rules rather than assuming that the proposed 5%/18% choice is available. The final framework could also change after further examination of its impact on revenue, compliance and different categories of vehicle users.

For the passenger transport and vehicle-rental industries, the eventual decision could influence fleet economics, leasing choices and EV adoption. If the Council ultimately approves broader ITC with a two-rate choice, operators would gain greater flexibility in structuring their GST liabilities; if the proposal is modified, the final rules will determine how much tax relief businesses actually receive.