JULY 17, 2020

By Sohrab Bararia, Director & Ekta Agarwal, Deputy Manager, Deloitte Haskins and Sells LLP

THE recent wave encouraging promotion of pollution-free and eco-friendly environment has led to the growth of electric vehicle ('EV') segment in the automobile sector. Although the EV industry in India is still at an incipient stage, the Indian government has laid out ambitious plans for this segment to grow. However, it is pertinent to note that like solar based projects, the EV industry too is facing classification related challenges from a Goods and Services Tax ('GST') perspective. The issue stems from the debate on applicable GST rate, when EVs are sold with/ without fitment of battery. This article elucidates the said issue and draws light on the challenges faced by industry players, in the EV segment, from a GST rate perspective.

Appropriate tariff heading and related classification of 'Motor cars and other motor vehicles':

Before we proceed to discuss the issue at hand, it is imperative to highlight the relevant chapter heading for classification of all types of motor cars:

Chapter 8703 classifies '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'. Therefore goods, i.e. motor cars, falling under the said chapter merit chargeability of GST @ 28%. However, an exception has been carved out for electrically operated vehicles (including two and three wheeled electric vehicles) which though merit classification under chapter 87, but are taxable at the rate of 5%.

Electrically operated vehicles and the issue under consideration:

At this juncture, it is imperative to define the term 'electrically operated vehicles', as coined under the relevant rate notification issued under the GST laws.

"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".

In view of the above-mentioned definition and exception carved out for electrically operated vehicles under chapter 8703, the EV industry is facing an issue in classifying 'electric vehicle sold without battery fitment', as an electrically operated vehicle (defined supra ) to merit 5% GST rate. In view of the said anomaly and drawing reference to the relevant laws and legal precedence in this matter, the ensuing para(s) have discussed on the said classification diaspora.

Technical literature and relevant judicial precedence:

Typically, a vehicle runs using the power generated by battery, supplied to the motor to rotate the wheels, unlike a fossil fuel powered vehicle which derives its energy from an internal combustion engine or gear box. Therefore, fitting of battery in the vehicle, at or before the time of supply, cannot be considered as a pre-condition for the vehicle to be classified as electrically operated vehicle. Hence, any vehicle which depends on one or more electrical batteries for deriving electrical energy to operate, may fall within the ambit of electrically operated vehicles, irrespective of whether battery is fitted to it at the time of its supply or not. The said principle was upheld in the judgment passed by the Department of Revenue- Revisionary Authority in the case of Reva Electric Car Company Pvt. Ltd. [Order no. 497/2011-CX dated 19 May 2011]. The respondent company had exported electric battery operated cars without fitting of batteries and had paid the duty without availing the benefit of concessional duty benefit as prescribed under Notification No. 6/2002-C.E., dated 1 March 2002 for battery powered road vehicles. The respondent thereafter claimed cash refund of entire duty paid. The appellate authority observed that the term battery powered road vehicles as defined under the notification meant road vehicles which are run solely on electrical energy derived from one or more electrical batteries fitted to such road vehicles. Since the impugned vehicles are designed to run solely on electrical energy, even if they are not fitted with batteries at the time of export, they will run on battery as and when put to use. Hence, it has been adjudged that the impugned cars qualify as battery powered road vehicles and concessional duty shall be applicable on such exports. Further, cash refund shall be allowed only for the amount of duty payable and refund of excess duty paid through CENVAT credit account shall be allowed only through re-credit in CENVAT account and not by way of cash.

From a perusal of the above, it may be noted that the definition of the term 'battery powered road vehicles' as analysed in the judgment ( supra ) is similar to the definition of electrically operated vehicles as contained under the GST rate notification. Accordingly, a ratio-decidendi may be drawn that vehicles merit classification as 'electrically operated vehicles', even when supplied without fitment of battery.

Further one needs to look at Rule 2(u) of The Central Motor Vehicles Rules, 1989 (here-in-after referred to as 'CMVR') read with the Motor Vehicles Act, 1988, wherein "Battery Operated Vehicle" is defined as a vehicle adapted for use upon roads and powered exclusively by an electric motor whose traction energy is supplied exclusively by traction battery installed in the vehicle. The aforesaid definition amply clarifies that for a vehicle to be construed as a battery operated vehicle, same must be powered exclusively by electric energy derived from its battery.

Placing reliance on the aforesaid, neither the CMVR nor the GST Act, mandates fitting of battery in the vehicle at the time of supply to customers.

A detailed iteration on the appropriate tariff heading and related classification becomes the need of the hour, not only to avoid any protracted litigation but to ensure lower incidence of tax cost on buyers.

[The views expressed are strictly personal.]