Cabinet Clears Compensation Cess Hike Edict on Luxury Cars & SUVs

The increase in the compensation cess would ensure that taxes collected come back to the pre-GST levels.

(Photo: The Quint)

The Union Cabinet on Wednesday cleared an ordinance to increase the maximum compensation cess for luxury cars and sports utility vehicles to 25 percent from 15 percent earlier as their tax burden has fallen under the Goods and Services Tax regime.

This is only an enabling provision, Finance Minister Arun Jaitley told reporters. It is now up to the GST Council to decide on the quantum of cess hike within the 25 percent cap. The Council may take up the issue at its next meeting on 9 September.

With this, the prices of SUVs, mid-sized, large and luxury cars are likely to go back to pre-GST levels. The hike in the GST cess cap is not across all category of cars.

Revenue Secretary Hasmukh Adhia clarified

The ordinance is along expected lines, Pawan Goenka, managing director of Mahindra & Mahindra Ltd said in a press release.

Also Read: SUVs, Luxury Cars to Cost More as GST Cess Hiked to 25%

What is critical to the industry is when, how much, and on what criteria will the cess be increased. The industry has made a representation to the government and we await the final decision.

Pawan Goenka, MD, M&M 

The GST Council had earlier finalised a highest cess of 15 percent on cars. Cess on cars earlier stood at 1 percent, 3 percent and 15 percent, depending on the engine capacity and length. Cars with a length of over four metres, and an engine capacity of over 1200cc, but below 1500 cc attract a cess of 15 percent. The same quantum of cess is levied on cars with an engine capacity of more than 1500cc. The compensation cess is levied over and above the GST rate of 28 percent.

The total levy, including the compensation cess, on luxury cars and SUVs had come down under the new indirect tax regime compared to the pre-GST tax structure. The GST Council had considered the issue in its 20th meeting held on 5 August, and recommended that the central government move legislative amendments required for increasing the cap on cess charged on such vehicles under the label 8702 and 8703 to 25 percent instead of the present 15 percent, an official release from the finance ministry had said earlier.

The increase in the compensation cess would ensure that taxes collected come back to the pre-GST levels, the ministry’s statement had added

As a result, the move is unlikely to materially impact demand for the luxury cars and SUVs, Shrikant Akolkar, auto analyst at Angel Broking told BloombergQuint over the phone, ahead of Jaitley’s press briefing.

Also read: Hike in Cess on SUVs: A Case of Tinkering with Taxes Gone Wrong?

The cess would mean that the car prices will come more or less to the pre-GST levels.

Shrikant Akolkar, Auto analyst at Angel Broking told BloombergQuint

Ahead of the Cabinet briefing, Maruti Suzuki said any increase in taxes is likely to impact demand negatively.

The automobile industry is price sensitive, and every hike in prices impacts demand adversely... Whether it’s a cess hike or cut, Maruti Suzuki plans to pass it on to customers.

RS Kalsi, Executive Director of Marketing and Sales, Maruti Suzuki told BloombergQuint

(This article was originally published in Bloomberg Quint.)

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