Goods and Services Tax (GST) is soon going to be put into effect in India, and the GST Council has already fixed rates for about 1200 items on 18th May. How will this tax effect car buyers? Under the new tax law, cars will be subjected to a standard 28 % tax rate and some additional cess. Although the rate of cess and classification of vehicles has not yet been revealed. While many products are expected to get cheaper, small car buyers may face disappointment.
"While the taxation of luxury vehicles is widely being expected at 28% plus a cess of 15%, what is interesting to note, that as per the media reports, the Council seems to be considering levy of a cess even on small cars in addition to GST at 28%, albeit at a much lower rate compared to luxury vehicles," Sarika Goel, Tax Partner, EY India, said. "Definition of what would classify as small cars and luxury cars respectively is also awaited – it appears likely that the same would be based on engine capacity, length etc rather than the retail price," she added.
Current tax structure for small cars (less than 4 metre in length and petrol engine under 1,200 cc and diesel engine under 1,500 cc) includes 12.5 % tax, with another 12.5% to 14.5% of VAT and levies, bringing the total rate up to between 25% to 27.5%. With the implementation of the new GST tax rates, the total tax figure may be increased to more than 29%, resulting in an increase in prices of small cars. Small car segment is majorly dependent on competitive price. Such a price hike is likely to have a negative impact on purchases. Speaking of mid-segment cars such as the Honda City and the Hyundai Creta, these will largely remain unaffected GST rates as these vehicles are already charged at around 43% of tax rate.
Coming on to luxury vehicles, GST will come as a relief to those looking forward to purchasing a luxury car or SUV. Luxury vehicles currently are taxed heavily at 55%, however post GST this tax would slip down to 43% (28% + 15%), resulting in a reduction of 12% in the tax rate. Concessions or rebates on hybrid and electric vehicles are awaited from the Government.
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