Over the past year, India’s automotive giants have been served significant indirect tax scrutiny. Maruti Suzuki is contesting a GST Input Tax Credit (ITC) reversal of Rs 139.3 crore. Eicher Motors faces a Rs 168.19 crore notice under Reverse Charge Mechanism (RCM). Volkswagen India is battling a Rs 11,200 crore customs duty demand over import classification. These cases are not anomalies; they reflect systemic patterns linked to how the auto sector operates.
The intersection of complex operations and evolving tax regulations has positioned the automotive industry as a frequent recipient of tax scrutiny. Here’s why.
1. Supply Chain Complexity and ITC Apportionment
Automotive manufacturing involves an extensive, layered supply chain—Tier 1 suppliers, component vendors, and a wide range of service providers. Many input services, like marketing and administrative expenses, are used for both taxable and exempt activities (such as exports or CSR).
GST Rules (42/43) require companies to reverse a proportion of ITC on these shared services. However, accurately determining this proportion is operationally intensive and prone to disputes.
Maruti Suzuki’s Rs 139.3 crore ITC reversal demand underscores how minor discrepancies in allocation can scale into substantial tax scrutiny in automotive, with tax claims ballooning due to the sheer transaction volume in the industry..
2. Classification Disputes: SUVs vs Cars
The applicability of Compensation Cess depends directly on vehicle dimensions—length, ground clearance, and engine capacity. Multiple automakers have received show-cause notices (collective exposure nearing Rs 10,000 crore) for allegedly misclassifying SUVs as cars, thus paying lower cess.
As vehicle designs evolve, with crossovers and compact SUVs blurring traditional classifications, disputes emerge over which models attract higher cess rates. The existing tax guidelines have struggled to keep pace with these product innovations, leading to recurring classification challenges.
According to Business Standard, the SUV vs car classification dispute has resulted in notices to over 10 leading OEMs, with cumulative tax demands touching Rs 10,000 crore between 2022 and 2024.
3. CKD vs CBU Imports: Customs Duty Contentions
To optimize costs, automakers import vehicle parts as Completely Knocked Down (CKD) kits, benefiting from lower customs duty, while assembling vehicles domestically. However, customs authorities often challenge whether these imports are genuinely CKD or merely Completely Built Units (CBUs) imported in disassembled form to exploit concessional duty rates.
Volkswagen India’s Rs 11,200 crore dispute exemplifies this issue. Such classification disputes are industry-specific, arising from the automotive sector’s reliance on phased manufacturing and local assembly strategies.
4. Dealer-Driven Sales and GST Reconciliation Challenges
Unlike industries with centralized sales models, automakers distribute through widespread dealer networks across states. This decentralized model adds layers of complexity in GST compliance, particularly when reconciling outward supply declarations (GSTR-1) with tax payments (GSTR-3B).
Incentive schemes, volume-based discounts, and inter-state stock movements introduce variables that often result in reporting mismatches. Such discrepancies are often at the heart of tax scrutiny in automotive, triggering demand notices during GST audits even when they arise from procedural lapses rather than deliberate misreporting.
5. RCM Liabilities on Logistics and Ancillary Services
The automotive sector’s heavy dependence on third-party logistics and outsourced service providers brings a high volume of transactions under the Reverse Charge Mechanism (RCM). Determining whether certain services fall under RCM obligations can be contentious.
Eicher Motors’ Rs 168.19 crore demand for alleged non-payment under RCM illustrates how operational scale amplifies even minor classification disagreements. The fragmented nature of logistics vendors further complicates compliance tracking.
Conclusion
The pattern is clear: the automotive industry’s operational framework—extensive supply chains, evolving vehicle designs, import dependencies, and dealer-led sales models—creates scenarios where tax rules are frequently open to interpretation. This structural complexity explains why automakers consistently face high-value indirect tax disputes.
For companies, this means adopting solutions that can manage both ends of the compliance spectrum — ensuring accurate, real-time GST reconciliation and providing visibility over the lifecycle of tax notices. GSTrobo is designed with precisely these needs in mind: automating ITC reconciliations, highlighting discrepancies before audits catch them, and equipping tax teams with a centralized dashboard to track, manage, and respond to notices efficiently.
When compliance operations are this layered, automation isn’t just an efficiency upgrade — it becomes critical for accuracy and control.
