Lets drive a Car through the roads of Taxation

NANO has generated huge excitement in the automobile world. Every Indian is proud of this product, being the cheapest, smallest and affordable car. Car sales are zooming in India and lot has been written on Cars, Automobile Products, Technology and Auto Companies. Automobile lovers are now taking a look on every new innovative car models.

A small attempt is made to peep into the Taxation of Cars, which may be helpful to car loving employees, professionals and businessmen’s. In this paper attempt is made to brief the various taxes that comes into way when we buy, run, maintain or sell a car.

Cars are the most loved and admired status symbol for men. We plan our business, finance and then purchase any valuable asset or make any investment.

            Planning of finances for purchase of car is incomplete without knowing its tax aspect and impact. To get through the gist of important provision, sections, etc under Income Tax Act 1961, Wealth Tax Act, Excise, Service Tax and Vat Acts following information is provided. Let’s drive through the curves of taxation.  

Let’s drive trough roads of EXCISE DUTY:

The car owner did not have to drive himself through the roads for Excise duty, but his car does travel through this road before reaching the location of dealer from whom the car is purchased.

Automobile Manufacturer has to pay Excise duty on Sales Value (Assessable Value) of Motor Car as follows, when the car is removed from the factory gate and delivered to dealer’s showroom;

      Excise Duty                                16%

      Education Cess                           2%

      Higher & Secondary Edu Cess      1%

      Additional Excise duty                 4% (On Assessable value plus above taxes)

If imports are made than custom duty is levied @ 10% on Assessable value as per Bill of Entry.

Spare parts and components are taxed at the same rate of motor cars when sold by manufacture to dealer.

Let’s drive trough roads of SALES TAX:

The owner of car has to drive on this road once when he purchases the car from dealer and then after when goes for servicing of the car.

The authorized dealer purchases car from manufacturer and in turn sales to customer. The dealer charges Value Added Tax on the selling price.

Generally in all state level Value Added Tax and Sales tax Acts, to purchaser other than dealer doing business of cars, Set off is not available on VAT/ Sales tax paid on purchases of Motor Cars and there fuel though used in business. In some states Entry Tax and Octroi Charges also effects the value of motor car and for which set off is generally not available. Thus on state to state basis impact of VAT/ sales tax, Entry Tax, Octroi is to be determined. Motor cars are taxes @ 12.5% under local state vat acts across the states of India and Under Central Sales Tax Act, @ 2% against Form “C”. Spare parts and components are taxed at the same rate of motor cars. Composition Scheme are there in some states, like in Maharashtra Second Hand motor vehicle sales is taxable @ 1.875% of Sales Price.

Let’s drive trough roads of RTO TAX:

After purchasing the Car from the dealer, the customer has to pay RTO tax, i.e, registration charges collected by Regional Transport Officer. These taxes are collected by State government on selling value of car against registration of vehicle in there state. For Passenger (Normal for own use) and Taxi (Commercial use) passing the charges are different. Normally it ranges from 4% to 8%.

Let’s drive trough roads of SERVICE TAX

The road of service tax is some what straight and short. Journey on the service tax road start from home of car owner and ends at dealer service station. Twice or trice in a year one may have drive on this road.

            After owing a car, customer goes to dealer for regular servicing of car. Service tax is collected by the dealer on labour portion and VAT on Spare parts portion of the bill.

Under service tax AUTHORISED SERVICE STATION SERVICES are taxed as follows:

Any person who satisfies the statutory definition of ‘authorised service station’ is required to pay service tax @ 10.3 % towards specified services provided by them, which is designated as ‘taxable service’.

Authorised service station means any service station, or center, authorised by any motor vehicle manufacturer, to carry out any service or repair of any motorcar, light motor vehicle or two-wheeled motor vehicle manufactured by such manufacturer.

Taxable service is any service provided to a customer, by an authorised service station, in relation to any service or repair of motorcars, two-wheeled motor vehicles or light motor vehicle.

Lets drive trough roads of INCOME TAX ACT 1961:

While driving car through roads for Income tax, one should be careful, as it very dumpy and zig zak road. There are various curves, so watch the sign boards and then drive.

Cars are used for business purpose by the professional and business persons for which under income tax act provision are given below. For employees using cars for official and residential purpose the taxation under salary is also given below.

Under Income Tax Act 1961, “Commercial vehicle” means “heavy goods vehicle”, ”heavy passenger motor vehicle”, “light motor vehicle”, ”medium goods vehicle” and “medium passenger motor vehicle” but does not include “maxi cab”, “motor cab”, “tractor” and “road roller”. The above expression shall have the meanings respectively as assigned to them under section 2 of the Motor Vehicles Act, 1988.

            As definition of “motor car” is not separately prescribed under Income Tax Act, 1961, thus definition in common parlance as mentioned in The Motor Vehicles Act, 1988 may prevail.

1^st Curve:

Income under the head the Salary:  

Income under the head “Salaries” comprises remuneration in any form (including perquisites) due for personal service under an express or implied contract of employment or service. Thus, the contractual relationship should be as between an employer and employee. Income from “salaries” is chargeable to tax on due basis in India.

 Important points-

1. Month- The word month in the table denotes completed months according to the English calendar and a part of t he month is left out of consideration.
2. When two are more cars are allowed-  two are more cars  owned or hired by the employer and  the employee or his household member are  allowed the use of such motor car- The perquisite is valued as follows:

In respect of  one of such  cars ( as selected by the employee), the value of perquisite shall be the amount calculated in accordance with B(2) of the above table as if the  employee provided one motor car for use partly in the performance of his duties and partly for his private or personal purposes.

In respect of the other cars, the value of perquisite shall be the amount calculated in accordance with B (3) as if he had been provided with such car or cars for his private or personal purposes.

3. Car at confessional rate- If motor car is provided at a concessional rate, the valuation is made according to the basis stated above as if the employee has been provided a free motor car and the amount so computed is reduced by the amount charged by the employer for use of motor car. However nothing is deductible in situation B (2) and C (2) of the above table in respect of amount recovered from employee.
4. Car facility between office ad residence- the use of motor car by an employee for the purposes of going from his residence to the place where the duties of employment are to be performed or from such place back to his residence, is not chargeable to tax
5. Conveyance facility provided to High Court Judges and to Supreme Court Judges is not chargeable to tax.
6. Specified employee means 1) Director 2) Employee having substantial interest in company 3) Employee drawing salary in excess of Rs.50, 000 per year.

Perquisite in respect of motorcar is taxable in the hands of specified employees from the assessment year 2010-11. [Perquisite in respect of motorcar is not taxable in the hands of employees from the assessment year 2006-07 (Financial Year 2005-06). However it is chargeable in the hands of employers as fringe benefit tax. Only a company, firm, local authority and an artificial juridical person are liable for fringe benefit tax even if they do not have any income which is chargeable to income-tax.]

Valuation of the Perquisite in respect of movable assets (Motor Car) sold by an employer to its employees at a nominal price:

The value of benefit to the employee arising from the transfer (directly or indirectly) of Motor Car belonging to the employer to the employee (or any member of his household) shall be determined as follows:

Note: Normal wear and tear for a part of the year is not taken into consideration.

2^nd Curve:

 Income under the head Profits and Gains of Business & Profession: -

Under Income tax act “Business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. “Profession” is defined to include vocation. Income from the exercise of any profession or vocation which calls for an intellectual or manual skill falls under this head. It covers cases of doctors, lawyers, chartered accountants, architects, consulting engineers, artists, sculptors, musicians, singers, etc.

1. Depreciation: -

On Acquisition of a Motorcar the following amounts/ expenditures are capitalized on which depreciation is admissible:

1.       Actual Cost of Car.

2.       RTO Tax.

3.       Insurance.

In order to avail depreciation one should satisfy the following conditions:

a.       Asset must be owned by the assessee.

b.       It must be used for the purpose of business or profession.

c.       It should be used during the relevant previous year.

Where an asset is acquired and put to use for the purpose of business or profession for less than 180 days during the previous year in which it is acquired, depreciation thereon shall be allowed at 50% of the depreciation allowable according to the percentage prescribed in respect of the block of assets comprising such asset.

Depreciation is available in the case of a foreign made car in the following cases:

1.       Where a foreign made Motorcar is used outside India in business or profession carried on by the assessee in another country.

2.       Where a foreign made car is acquired after 31-3-2001 and used for business purpose in India.

2. Revenue Expenses:

      Expenses for running, repair and maintenance, driver’s salary, insurance, Interest on Loan, etc are admissible as revenue expenditure.

3. Value of any benefit or perquisite: –

The value of any benefit or perquisite, whether convertible into money or not arising from the business or the exercise of the profession, is taxable as Income from Business or Profession:

Ø       Where partner is allowed by firm to use of residential premises, car & telephone, value of such perquisites is includible in Income of assessee.

Ø       For determination of perquisite value of vehicle provided to a director of a company for his free use, rules as mentioned in salary head can be applied even though he is not an employee of the said company.

4. Sales of Motor Car when used in business or profession:

3^rd Curve:

Income under the head Capital Gains:

Personal effects being movable property are not capital assets. Personal effects include car, cycle, scooter, motorcycle owned and used by the taxpayer. Hence the provisions relating to Capital gains are not applicable in case of motorcar.

5th Curve:

      Gift of Motor Car:

Under Income tax act gift of motor car is not taxable in hands of donee, if doner and    donee falls under definition of relatives. Gift to a stranger may be taxable. Transfer formalities under different RTO authorities if advisable along with gift deed.

Let’s drive trough roads of WEALTH TAX ACT, 1957:

The road for wealth tax is for heavy vehicle having luxury. The car owners of posh vehicles like Mercedes, Audi, BMW, etc be aware of it. As these cars having heavy price are only allowed to drive.

Only an Individual, Hindu Undivided Family and a Company is chargeable to wealth-tax in respect of net wealth as on March 31 immediately preceding the assessment year 2010-11 in excess of Rs.30,00,000 (Rs.15,00,000 in A.Y. 1993-94 to 2009-10) @ 1%(no surcharge and education cess). Broadly speaking Net wealth represents excess of assets over debts. Loan taken on car is a debt which is deductible from net value of car. Market Value as on valuation date is taken as value of motor car.

Except the following two cases any other motorcar is an asset for wealth tax purpose:

1. Motorcar used by the assessee in the business of running them on hires.
2. Motorcar treated as stock in trade.

• For this purpose, “motor car” covers all motor vehicles other than heavy vehicles.
• In the case of a Leasing company, motorcar is an asset.

The above information is to guide for driving safely through the dangerous carves of taxation. It is recommended to go through the relevant acts and have expert advice before implementing any planning in taxation area. The author is not responsible for any accident (decision) taken on above curves (information) without referring to Sign Boards (law and its rules, etc), as on roads of taxation “Parking is on Owners Risk”. Wish u all a happy driving trough the roads for taxation.

By: CA Umesh Sharma