Beyond the Wheel: Navigating Tax and Compliance for Company Cars

How Company Cars Became Compliance-Critical

India’s corporate mobility landscape is evolving rapidly, fuelled by rising fleet demand and accelerated EV adoption. Companies now acquire vehicles both traditional and electric not just for transport but as strategic assets supporting operations, retention, and sustainability goals. With corporate buyers accounting for nearly a quarter of passenger vehicle sales and over one-third of new commercial EV registrations, a company-owned car is no longer just an asset; it is a transaction examined by multiple laws, each ultimately asking the same question: Is the vehicle truly for business use, or does it mask a personal benefit as a corporate expense?

Income-Tax Act, 1961

The Income-Tax Act evaluates a company car based on its role in income generation. It measures whether the asset supports business operations or conceals personal advantage.

TCS on Car Purchases: When a company purchases a car from a dealer and the sale consideration exceeds INR 10 lakhs, the dealer is required to collect Tax Collected at Source (TCS) at 1% of the transaction value u/s 206C(1F). This TCS is collected at the time of sale and applies regardless of when the vehicle is registered in the company’s name. The amount collected is deposited with the government and can be claimed as a tax credit by the company.

Depreciation: Under Section 32, motor vehicles used for business are depreciated at 15% per annum, acknowledging loss of value over time. However, this depreciation is allowed only if the car is used primarily for business activities. If the car is used for entirely/partially for personal purposes, the depreciation claim may be disallowed or restricted by tax authorities.

Running & Maintenance: Expenses such as fuel, repairs, insurance, and driver salary qualify as deductions under Section 37 only if they are “wholly and exclusively for business.” Judicial precedents have upheld proportionate disallowance of expenses where personal use is mixed or where the taxpayer fails to maintain proper records.

Court Ruling on Depreciation Disallowance for Personal Use: Courts have held that if company cars are used partly for personal purposes, depreciation must be proportionately disallowed. In Commissioner of Income Tax vs Sundaram Industries [1996] 232 ITR 337, the Madras High Court ruled that depreciation cannot be fully claimed when personal use is involved, reinforcing the need for proper allocation between business and personal use.

Perquisites - When Usage Becomes a Benefit: Use of company cars for personal purposes by employees or directors is treated as a taxable perquisite. This ensures that business profits are fairly reported and that corporate expenses are not misused to hide private gain.

Taxability on sale: When a company sells a car, the tax treatment depends on how the car was used and how long it was held:

If the car is used for business purposes and is part of the block of depreciable assets, the sale price is compared with the written-down value (WDV) of the asset.

• If the sale consideration exceeds the WDV, the excess amount is deemed to be capital gains arising from the transfer of short-term capital assets under Section 50.
• If the sale consideration is less than the WDV, the difference reduces the value of the asset block, potentially resulting in a capital loss if the block cease to exist.

However, if the car is held as a capital asset and part of non-depreciable assets, the sale is taxed under capital gains provisions (Section 45) and the gain is classified based on the holding period.

Goods & Services Tax (GST)

While income tax examines business purpose, GST ensures fairness in input tax credit (ITC)

Input Tax Credit: Section 17(5) of CGST Act,2017 blocks ITC on passenger motor vehicles with a seating capacity ≤ 13, irrespective of purpose. ITC is permitted only when the car is used in the furtherance of specific business activities such as passenger transport, driving schools, or certain taxable supplies related to transportation.

Repairs, Insurance & Accessories: When ITC on a car is blocked, GST also disallows ITC on related expenses such as insurance premiums, spare parts, and repair services. GST’s focus is not on profits but on ensuring that tax credits remain accurate and free from misuse.

GST Valuation on Sale of Used Car: When a company sells a used car, it is considered a supply of goods under GST. As per Section 15 the taxable value is generally the transaction value, meaning the price actually paid or payable for the sale.

Customs Duty

Imported cars attract very high customs duties in India, dramatically increasing their landed cost. Fully built cars (CBUs) now face a 70% Basic Customs Duty. However, an additional 40% Agriculture Infrastructure & Development Cess (AIDC) is levied only on luxury or high-value CBUs whose Customs Import Value (CIF) exceeds USD 40,000, making these vehicles substantially more expensive. In contrast, partially assembled units enjoy lower duties: Semi-Knocked-down (SKD) units are taxed at 20% and Completely Knocked-Down (CKD) kits at 10%, incentivising local assembly over direct import of finished vehicles.

Companies Act, 2013

Under Section 187 of the Companies Act, 2013, a company must hold any property in its own name, including motor vehicles purchased for business use. This ensures transparency in ownership and prevents assets from being parked in the names of employees or directors. When a car is registered in the company’s name, the company becomes the legal owner, responsible for maintaining proper records, reflecting the asset in its books, and ensuring that its use aligns with business objectives rather than providing undisclosed personal benefits.

Accounting Standards: Transparency and Disclosure

Capitalization and Depreciation: Under Ind AS 16 and AS 10 - Property, Plant and Equipment, company cars are capitalized as fixed assets. Depreciation expense (aligned with tax laws or accounting policies) reflects the asset’s consumption.

Personal Use Accounting: While accounting standards do not directly tax personal use, companies must ensure that any expense portion attributable to non-business use is identified and disclosed, avoiding misstatement of expenses.

Ownership vs Leasing: When acquiring vehicles for business use, companies often choose between outright ownership and leasing options. The following table highlights the differences to help businesses make an informed decision aligned with their operational and financial strategies.

Summary

Benefits of Buying a Car in a Company’s Name

• Tax Depreciation: Accelerated depreciation benefits reduce taxable income, improving cash flow.
• Business Expense Deductions: Legitimate business use expenses (fuel, maintenance) are deductible.

Conclusion

Although different laws focus on distinct objectives - from validating business expenses and protecting tax credit integrity to ensuring fair customs valuation and transparent financial reporting - they all emphasize one fundamental truth, which is that the transaction must be genuine, at fair value, and strictly reflect business use.

This integrated approach safeguards companies from misuse, optimizes tax positions, and ensures transparent reporting. A clear understanding of these intersecting requirements empowers businesses to manage company owned vehicles effectively and compliantly.

Disclaimer:

The information contained in this document is for information purposes only. In no way, this document should be treated as advice. Please reach out to us or your consultants for undertaking detailed analysis.

This author will not be liable for any loss or damage caused by the reader’s reliance on information obtained through this report. The contents are provided for your reference only.

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