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

Luxury carmakers are unhappy with the proposal to increase cess post-GST rollout.

The latest move by the government to hike the cess on luxury sedans and SUVs by 10 percentage points, within just about a month of the Goods and Services Tax being implemented, has caught automakers by surprise. What was the GST panel thinking before implementing the new rates? Did they not see the impact on SUVs and luxury cars and the subsequent reduction in prices?

It clearly seems that someone did not do their homework on this one. SUVs and luxury cars will cost more as GST cess has been hiked to 25%. The total incidence of tax post-GST had fallen to 43% from 55% earlier. That was a 12.3% drop in taxes on SUVs and luxury sedans. The panel has now cleared a 10% increase in the cess, which will now take it to 53%. Did the panel not realise that prices of luxury cars would drop?

Also read: Luxury Cars Hit a Tax Pothole in India

Many luxury car and SUV makers had cut prices on their vehicles as soon as the GST regime kicked in. Some were offering huge discounts even before GST kicked in. This move to hike the cess has clearly left many in the lurch.

We are highly disappointed with the decision. We believe this will be a strong deterrent to the growth of luxury cars in this country. As a leading luxury car maker, this will also affect our future plans of expansion under ‘Make in India’ initiative, which aims at making and selling world-class products in India, with the latest technology for end consumers. We feel deprived as the leading manufacturer of luxury cars in India, who has been championing ‘Make in India’. This decision will also reverse the positive momentum that the industry wanted to achieve with the introduction of GST. With this hike in cess, we expect the volume of the luxury industry to decelerate, thus offsetting any growth in the potential revenue generation that could have come with the estimated volume growth.

Roland Folger, MD & CEO, Mercedes Benz, India

Folger also added, "One of the original benefits expected out of GST was rationalisation of tax rates. Luxury cars and SUVs are one of the segments that long required tax rationalisation, as this segment remains highly taxed. Further, in the pre-GST regime, the taxes to the final customer were varying widely from state to state depending on the VAT applicable in respective states. Also, one month is too short a period to consider an upward revision in rates. The market performance should have been watched for at least 6 months before it was relooked. The current proposal of increase in cess clubbed with the increased road tax rates, will take the effective consumer price much above the pre GST scenario level."

However, there is still hope. Before this hike in cess can be implemented it will have to be discussed at the meeting of the GST panel on 9 September. And once it has been discussed, the compensation law will have to be amended to implement this hike in cess. The cess is used to compensate states on likely losses from the implementation of GST, for a period of five years.

The vehicles that will be most affected by this are the once that come in the 43% bracket - which includes all vehicles over 4 metres in length, with an engine capacity of over 1.5 litres. This would apply to SUVs and most midsize to luxury sedans.

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