New GST tax structure fails to make mass-market cars cheaper

Unlike earlier expectations, compact cars might not undergo any price-reduction, resulting in a huge disappointment for the buyers and the automotive industry.

By: | Updated: November 3, 2016 6:56 PM
Compact cars too will be taxed at 28 %, contrary to the earlier expected rate of 18 % Compact cars too will be taxed at 28 %, contrary to the earlier expected rate of 18 %

The GST Council has announced the final tax structure ranging from 5 percent to 28 percent and in general that isn't good news for all of the automotive industry. As per the GST Council's announcement, the tax rates decided under the GST structure are 5 %, 12 %, 18 % and 28 %. All cars except the luxury segment will fall under the 28 percent slab. This comes as a surprise as the industry had been expecting a lower 18 % rate instead. Let's take a look at how various segments could get affected by these new rates.

Going by the newly rate, cars under 4 metre in length with a petrol engine under 1.2 litre and diesel engine under 1.5 litre will be taxed at 28 percent, which is the same as present. This would essentially mean no change for vehicles in this segment. Mid-segment cars though might benefit from the new rates as they are presently taxed at 40 percent. If the GST Council's definition of luxury cars includes cars longer than four metres, they will continue to be taxed at 40 %. However, if the length is coupled up with engine capacity lesser than 1.5 litre for diesel, some cars with smaller engines could benefit a bit. In addition, cars such as the Maruti Suzuki Ciaz and the Ertiga, which are classified as hybrid by the Government, could attract additional rebates. Other hybrid vehicles and electric vehicles too will attract rebates under the FAME scheme, resulting in some price-reduction for them.

Luxury car, a segment that hasn't been defined yet, will be subjected to 28 % tax plus cess. Our present estimates peg the final tax rate for luxury cars at 40 %, which is lower than the present rate of 50 %. This could mean in luxury cars too undergoing a minor cost-reduction but whether this will be passed on to the consumer is yet to be seen. Whether this classification includes CBUs (Completely Built Units), is yet to be confirmed but the likelihood seems slim, given the Government's focus on the Make In India program.

The exact result of the GST tax structure on various classifications of cars is yet to become clear. However, for the mass-market buyer, the new rates bring no relief, which is a disappointment. The automotive industry too along with the suppliers will not be happy with the new rates as their hopes of lower prices and the resulting higher sales will be deflated.

Stay tuned for more details on how the new GST tax structure will affect car prices across segments.