How GST will affect car prices in India from Maruti Alto to Honda City and Mercedes S-Class

Under the new GST structure, cars will be subjected to a standard 28 % tax rate and some additional cess. The rate of the cess and the classification of vehicles under this structure is yet to be disclosed by the GST Council.

By: | Updated: May 19, 2017 4:06 PM

The country is moving rapidly towards the implementation of the Goods & Services tax (GST) and the GST Council has already fixed the rates for more than 1,200 items on 18 May, Thursday. While a lot of essential items such as consumer goods are set to become cheaper, small car owners might have to face disappointment. Under the new GST structure, cars will be subjected to a standard 28 % tax rate and some additional cess. The rate of the cess and the classification of vehicles under this structure is yet to be disclosed by the GST Council.

Speaking about the change in taxation, Sarika Goel, Tax Partner, EY India, said “While the GST Council debated GST rates for vehicles, no consensus was reached on the same during today’s meeting. 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. 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. The FM, during the press conference post today’s meeting, mentioned industrial intermediates being taxed at 18% GST; however, it is not yet clear whether auto components would fall under this category.”

Under the present tax structure, small cars (less than 4 metre in length and petrol engine under 1,200 cc and diesel engine under 1,500 cc) are taxed at 12.5 % and with another 12.5% to 14.5% of VAT and levies, the total rate goes up to between 25% to 27.5%.

The new tax rate after the implementation of GST will push the total tax figure to more than 29%, resulting in an increase in prices of small cars. In the most price-sensitive segment in the country's automotive market, this increase could have a negative effect on the buying sentiment and thereby affect the manufacturers adversely.

Mid-segment cars such as the Honda City and the Hyundai Creta are likely to remain unaffected by the GST rates as these vehicles are already charged at around 43% of tax rate. The flat 28% tax and 15% of cess will bring the total to 43%, resulting in almost no change. However, if the cess on this segment of vehicles, we might witness a small reduction in prices.

People looking to buy luxury cars or SUVs though have a reason to rejoice as GST might bring down the prices of such vehicles. Vehicles falling in this bracket are subjected to a heavy tax rate of around 55% in total. Post GST implementation, this rate will come down significantly to 43% (28% + 15%), resulting in a reduction of 12% in the tax rate. This means your next luxury car or SUV could soon become considerably cheaper.

Concessions or rebates on hybrid and electric vehicles haven't been announced yet and announcement on the same is awaited from the Government.

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