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View from India: Car tax hike targets larger vehicles

The auto industry in India needs to gear up for what looks like a bumpy road ahead, as tax changes push up the price of larger and more polluting cars.

The auto industry in India needs to gear up for what looks like a bumpy road ahead. The Goods and Services Tax (GST) Council has taken a decision to hike the ‘cess’ on mid-sized cars by 2 per cent, taking the effective GST rate to 45 per cent. There’s also a hit to the large cars market, as cess has been increased by 5 per cent. This takes the total GST rate to 48 per cent while the SUV segment sees a rise of 7 per cent to 50 per cent GST.

In India, ‘cess’ is a tax raised for a specific purpose.* On 9 September, the GST Council announced this decision on cess compensation for the auto industry, which has come into effect on September 11. On the one side, the revised tax rate has largely erased anomalies, on the other hand, the hike is relatively lower than the widespread fear of a flat 10 per cent increase on all passenger vehicles that are not classified as small vehicles, as defined by the government.  

Overall, the cess on automobiles has risen from 15 per cent to 25 per cent. This increase has happened through an ordinance promulgated by the GST Council, consisting of Union and state finance ministers.

Goods and Services Tax, which is India’s biggest tax reform, became operational on 1 July. Under GST, it has been envisioned to create a “One Nation, One Tax” system that is being executed in a standard manner in all the states of India. Based on this mandate, car prices had come down by about Rs 3 lakh (£3,500), making them much lower than with the combined central and state taxes in pre-GST days. So in order to equalise the price structure and fix this anomaly, the Council raised the compensation cess, which is designed to compensate states for loss of revenue resulting from the new system.

The Central Board of Excise and Customs (CBEC) tweeted, “Notification regarding increase in the effective rates of the Compensation Cess on specified motor vehicles will be issued on September 11, 2017, effective from 00 hours the same day.” CBEC plays an active role in the drafting of GST law and procedures.

Moving on, it is likely that automakers will have to pass on the cess hike to the customers. Under the revised rates, consumers may need to pay more for brands like Maruti Suzuki Ciaz, Honda City and Hyundai Verna, all due to the 2 per cent cess hike. Likewise, the price of small utility vehicles (SUVs) like Renault Duster, Hyundai Creta and Mahindra Scorpio could probably go up by 7 per cent. Large models such as Mercedes-Benz E-Class, Audi A6 and Jaguar XF are likely to see a price rise of 5 per cent.

Nevertheless, what appears to be a ray of hope is that the 1,200cc small petrol cars and 1,500cc diesel cars have been spared of cess. The hybrid segment, which includes hybrid mid-segment cars (less than 1500cc), hybrid large cars (more than 1500cc) and hybrid SUVs over 1500cc engines don’t see a price change as they have no cess on them. The price of motor vehicles for transport carrying up to 13 passengers remains unchanged.

Small cars, it is felt, are more fuel-efficient and less polluting than larger vehicles. Another rationale here is that these small cars generate volume business so any cess hike in this segment will lower overall sales in the auto industry.

Arguably the large cars are not a volume business. But when seen objectively, the money generated from this segment has a higher value. Now with the cess hike, to what extent it will affect the buyer sentiment needs to be seen.

 

*For more about cess, see www.indianeconomy.net/splclassroom/249/what-is-a-cess-how-it-differs-from-surcharge/

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