The GST Council Saturday voted in favour of having multiple tax levels for different vehicle segments taking the automotive industry back to pre-GST tax conditions.
The government slapped a hike of 2 percent on mid-size sedans, 5 percent on luxury cars and 7 percent on sport utility vehicles. These will be added to the 15 percent cess charged on such vehicles over and above the GST of 28 percent. Thanks to the hike prices of models from such segments are back to pre-GST levels.
In real terms the final tax on mid-size sedans will be 45 percent (28% GST + 17% cess), on luxury cars it will be 48 percent (28% GST + 20% cess) and on SUVs will be 50 percent (28% GST + 22% cess). The finance ministry did not tinker with the cess on small, electric and hybrid cars and their rates will remain unchanged. The ministry also, however, did not define ‘luxury vehicles’.
Source: Estimate based on ex-showroom price Delhi for base variant
The cess hike, although, is lower than the wide expectation of a flat 10 percent increase on all passenger vehicles which are not classified as small vehicles (as defined by the government). A small car is defined as a vehicle having length less than 4 meters, powered by either a petrol engine that is less than 1,200cc or a diesel engine of less than 1,500cc.
Likewise prices of top-selling mid-size sedans like Maruti Suzuki Ciaz, Honda City and Hyundai Verna will go up by 2 percent. Prices of all large SUVs like Renault Duster, Hyundai Creta, Mahindra Scorpio will increase by 7 percent. Luxury sedans and hatchbacks such Mercedes-Benz E-Class, Audi A6, Jaguar XF will see a price rise of 5 percent.
SUV specialist Mahindra & Mahindrawill be the hardest hit as 80 percent of its volumes comes from large SUVs. Toyota Kirloskar too, would be hit dearly as 90 percent of its sales come from bigger cars and SUVs.
Roland Folger, MD & CEO, Mercedes−Benz India “The decision to increase the cess yet again is very unfortunate and totally overlooks the contribution we make to the industry and to the economy. With this increase in cess now, the prices are bound to leap back to the pre-GST regime, in some cases higher than the pre-GST regime, thus negating altogether the benefits of GST regime.”
With the hike in cess the government has not just increased the gap between small and large cars but it has brought the tax level on large cars at the same level as it was before the roll out of GST. Taxes on small cars however remain at 3-4 percent lower than pre GST regime.
The government believes though small cars make up 80 percent of India’s total domestic passenger vehicle market they are more fuel efficient and less polluting than larger vehicles. Further, any hike in taxes on small cars will hurt demand severely as its buyers are mostly middle-class. This will translate to lower tax income for the government.