NEW DELHI -- Those in India who can afford sports utility vehicles and high-end luxury cars may soon be paying even more.
After a nationwide goods and services tax (GST) was rolled out on July 1, taxes on most cars except hybrids dropped significantly, encouraging automakers to cut prices for demand stimulus.
Mid-size cars, top-end vehicles, and SUVs were the biggest gainers with total taxes falling back to 43% (28% GST plus 15% "cess" - a specific additional tax) compared with 47%-58% before GST.
On Aug. 5, India's GST Council, which fixed rates ahead of the new tax regime, recommended increasing the maximum cess tax component for SUVs and luxury cars to 25%. The national government will have to amend relevant GST legislation in parliament to effect this change.
The decision on when to raise the actual cess leviable will be taken by the GST Council in "due course" according to a finance ministry statement on Aug. 7. The council is due to meet next in September.
Touted as India's biggest indirect tax reform since independence from British rule in 1947, the multi-tiered GST regime bundled up over a dozen confusing taxes. Various goods and services are now taxed under a new classification system at one of four rates -- 5%, 12%, 18%, or 28%.
Cesses have been imposed on "demerit goods" in the highest 28% tax category, such as luxury cars, cigarettes, and aerated drinks, and are meant to be used to compensate states that risk losing revenue under GST.
The government is working on the principle that any reduction in tax incidence on items of mass consumption would be welcome -- but unacceptable in the case of demerit goods. It is therefore rectifying anomalies that have seen effective taxes on some demerit goods reduced, and looking for further instances. The government has already acted. Two weeks after GST was rolled out, the government increased the cess on cigarettes after observing that tax overall came down by 7-8%.
The GST Council's plans for a cess hike on luxury cars has disappointed automakers, which have been publicly critical. Roland Folger, chief executive of Mercedes-Benz India, said the decision will be "a strong deterrent" to increasing sales of luxury cars in India.
"As a leading luxury carmaker, 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," Folger said. "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 volumes of the luxury industry to decelerate, thus offsetting any growth in the potential revenue generation that could have come with the estimated volume growth."
Folger also said that one month is too short a period to consider an upward revision in rates. He believes the market performance should have been observed for at least six months. "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," he said.
Rahil Ansari, head of Audi India, said that while sales of luxury cars are small in volume, they account for over 10% of the sector's revenue. "The taxes on this industry were already very high and we expected the unfulfilled potential of this segment to increase after the implementation of GST and rationalization of taxes," he said. "We will be forced to re-evaluate our business plans in light of this development."