Automakers hope Modi govt ditches Byzantine tax system for GST

May 27 2014, 14:15 IST
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Tax greatly drives up the cost of buying a car in India. (Reuters) Tax greatly drives up the cost of buying a car in India. (Reuters)
SummaryInvestors and manufacturers have long coveted GST as a game-changer that would simplify and often lower taxes.

Indian carmakers, battered by two years of slowing sales, hope the resounding election victory by India's new leader will spur replacement of the country's complex array of duties with a simple goods and services tax (GST).

Investors, too, are rooting for this and many other reforms from Prime Minister Narendra Modi's government. Enacting a GST faces significant hurdles - including approval by Rajya Sabha, where the Bharatiya Janata Party (BJP) lacks a majority. But Modi favours GST and the Congress party has promised to support the measure even when in the opposition.

Tax greatly drives up the cost of buying a car in India. By the time a new Maruti Suzuki SX4 sedan is driven out of a showroom, the buyer has paid taxes that equal about 50 per cent of the vehicle's basic price.

The burden can include a tax for moving the car across state lines from the north India factory where it was built.

Indian investors and manufacturers have long coveted GST as a game-changer that would simplify and often lower taxes, broaden collection and spark spending, adding as much as 2 percentage points of growth to Asia's third-largest economy.

"Indian taxation is always a very complex system," says Ajay Seth, chief financial officer of Maruti Suzuki India Ltd. "I think (GST) will be a significant help."

India's Byzantine taxation system and inconsistent collection pushes up costs and deprives the government of revenue.

In an indication of how tax collection is a headache, a recent World Bank survey on ease of doing business in 189 countries ranked India 158th for paying taxes - behind war-torn Afghanistan and neighbouring Bangladesh.

V.S. Parthasarathy, chief financial officer at Mahindra and Mahindra, India's largest sport utility vehicle maker, says that if overall rates come down under GST, this would be "a demand booster and it also allows for transparency".

WANTED: SIGNIFICANT REFORM

In India, a typical car buyer ends up paying 26-30 percent of a vehicle's retail price as tax, compared with 16-20 percent in South Korea and Germany, according to ratings agency Crisil.

In Japan, home of Maruti Suzuki's parent, Suzuki Motor Corp, customers pay up to about 11 percent tax on vehicle purchases, which includes the country's 8 percent sales tax and excludes annual ownership levies.

"The whole taxation system in India needs a very significant reform," said Sugato Sen, deputy director general of the Society of Indian Automobile Manufacturers.

In the last, Congress party-led government, two finance ministers wanted

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