GST luxury cars/ SUVs: World’s third-largest automotive market needs better policies

The governments' flip-flop policies continue to plague us with them retracting previously allocated benefits on luxury cars, leaving both manufacturers and consumer in a tizzy.

By: | Updated: August 9, 2017 5:42 PM

Disclaimer: I cannot guarantee how much of what you read in this post will hold true by the time you end up reading it. Ok, that's a first for me in over a decade of writing on the automotive sector - starting an article with a disclaimer. The reason for this is simple as the Government seems to shift its strategy on car prices so frequently that no one knows what's going to happen to vehicle prices by the time you end up reaching the showroom. GST has been the buzzword in the Indian economy over the last few months and auto sector being the key manufacturing sector has certainly been affected by it. Most of the vehicle makers and suppliers welcomed the 'One Nation, One Tax' theory in hopes of a less complicated taxation structure. Then came the GST and small cars, which form the backbone of personal mobility in India, didn't get much of a price-cut. There were some minor price-reductions but none were big enough to give buying a shot-in-the-arm growth. To the surprise of many, luxury cars and SUVs witnessed a major tax reduction, owing to which this segment of vehicles went through a price-cut starting from Rs 70,000 to around Rs 1 crore in case of the Lamborghini Aventador. That ladies and gentleman, is where the problem began.

Nothing wrong with this fundamentally since luxury cars were already being taxed heavily and allowing a new generation of young Indians to indulge in luxuries a bit earlier would only help the economy. However, people were quick to point out that the Government is pro-rich as luxury cars have become cheap and basic cars are largely unaffected. Our Government here reacted quicker than even privately-owned companies can and went ahead and increased the cess by 10 on large cars and SUVs. Within a couple of months, car prices have gone from maybe down, maybe up to somewhat down and fairly down and now we're back to more expensive than earlier in some cases and fairly expensive yet again. This kind of see-saw approach in a country of 120 + crore and one of the largest markets globally, does not bode well for the future.

Prior to GST, luxury cars were being taxed at around 52 %, while SUVs were subjected to about 55 %. After GST, these rates went down to a flat 43 % for both categories, resulting in a substantial price-reduction for such vehicles. Many carmakers and potential buyers rejoiced as this meant higher sales for these companies and in turn more jobs for us. Customers were happy as buying their dream wheels became a bit easier and sooner than they had planned earlier. Now though, the cess, which was capped at 15 % for these categories has been bumped up to 25 %. This means the total figure that stood at 43 % earlier has now gone up to 53 %, which in the case of large cars is higher than what it was before GST.

Now some of you must be thinking right now, what does a few lakh mean for luxury cars buyers mean but this is where things go really strange. Even the Hyundai Verna or Mahindra Scorpio will fall in this bracket and these can't really be termed as luxury vehicles. At blame here is the classification, under which cars longer than four metres and with engines displacing more than 1.5 litres is a large car. SUVs follow the same classification but have an added clause of not exceeding 170 mm of ground clearance. As a result of this change, the upcoming Hyundai Verna is already at a setback as it'll only be offered with 1.6 litre engines.

This isn't something new as earlier Governments too have been equally disappointing. We have had an unfortunate history of treating the automotive sector as a cash cow and scapegoat for covering up tax revenue errors committed elsewhere.

In about 15 years, look at the roller coaster ride the Indian automotive industry has gone through. Form being a petrol dominated market, we suddenly transformed to a primarily diesel-driven economy. That happened because the Government that time had no clue how to stop people from using subsidy allocated for agricultural use to drive personal vehicles. In a short span of time, companies had to revamp their assembly lines and engine shops. This naturally resulted in a massive financial burden on automakers. Various authorities saw this happening but preferred to stay mum as it didn't affect them personally. Suddenly, a few years later Delhi started facing acute pollution problems and the authorities, out of nowhere suddenly sprung into action. Putting all the scientific studies and research aside, it was decided that diesel is the culprit.

Thereafter, came the bright idea of banning diesel engines above 2,000 cc in Delhi. What this meant was that if you paid through your nose to buy a vehicle with the best possible diesel technology that meets Euro 6 emission norms, you cannot drive it as it's too 'Dirty'. However, if you have an old clunker that with every touch on the accelerator belches out smoke like steam locomotives did with steam, you're good to drive and cleanse the environment. Soon, people in the right places realised that they might have been right after all so BOOM! Another bomb explodes and all diesel cars older than 10 years are banned from registration in Delhi/ NCR.

All this in such a short span of time and that too for an industry, which needs 2.-3 years to adapt to any major change in technology. It's unfortunate to see one of the world's largest automotive industries to be struggling with a policy roller coaster.