How higher cess on bigger cars may impact hybrid vehicle volumes

By: | Published: August 9, 2017 5:30 AM

Sales of Maruti Suzuki's mild hybrid variants are likely to be adversely impacted following the GST Council's decision to recommend an increase in the cess on bigger cars to 25% from the existing 15%. The total tax incidence would rise to 53% from 43% post GST.

hybrid vehicle volumes, carsAccording to dealers across the metros, retail sales have fallen by as much as 25-30%. (Reuters)

Sales of Maruti Suzuki’s mild hybrid variants are likely to be adversely impacted following the GST Council’s decision to recommend an increase in the cess on bigger cars to 25% from the existing 15%. The total tax incidence would rise to 53% from 43% post GST.

These vehicles have already become costlier by between Rs  lakh and Rs 1.5 lakh, following the higher incidence of tax under the GST. Industry experts say the higher cess may see auto makers desisting from launching mild hybrid variants of their models.

Retail sales of the hybrid variants of Maruti Suzuki’s Ciaz and Ertiga have already been lower in July and August after the roll-out of the new indirect tax regime. With the models likely to become pricier — if the higher cess is levied — potential customers could stay away altogether.

Thus far, the hybrid version or the SHVS variant of the mid-size sedan Ciaz, or the utility vehicle Ertiga, attracted an excise duty of just 12%, compared with the Honda City which attracted a duty of 28%. This was thanks to the Faster Adoption of Manufacturing Electric Vehicles (FAME) scheme. The big difference in taxes meant the Ciaz and the Ertiga were relatively attractively priced. Almost 60-65% of the total volumes of the Ciaz and the Ertiga sold are hybrid variants.

According to dealers across the metros, retail sales have fallen by as much as 25-30% given the substantial increase in taxes to 43% on these vehicles under the GST.

The GST Council did not make any exception for hybrid vehicles like the electric ones and treated them on par with other vehicles, depending on the size of the platform.

“In general, car sales were down in the first week of July but recovered from the second week.  However, sales of hybrid vehicles are down by almost 40% since there is a sharp increase in prices. Otherwise, the volumes have picked up as expected,” said a Maruti dealer in Mumbai.

Both the Ciaz and the Ertiga were among the best-selling models for Maruti in the above-R6 lakh category, contributing 9.5-10% of total volumes. In the April -June quarter, volumes of the Ciaz had increased by 14.67% y-o-y to 15,698 units, while those for the Ertiga increased by 51.97% y-o-y to18,785 units. Maruti had recently started selling the Ciaz at its Nexa showrooms.

According to dealers and sales executives, in different dealerships the price difference between the Ciaz and other products like the City were as high as R2 lakhs, which attracted a lot of customers.

Consequently, Maruti became the biggest mid-size sedan manufacturer for the first time in the domestic market in FY17.

“After implementation of GST, inquiries for the hybrid variant of the Ciaz and the Ertiga have come down substantially. These were among the best selling products and margins on these cars are also very high. We hope there that the government decides against increasing the cess on these cars,” said another Maruti dealer in New Delhi.

Tax experts believe the cess on hybrid vehicles may not go up despite the recommendation from the GST Council. “Though the council has recommended an increase in cess, this may not go through. There has already been an increase in taxes on hybrid vehicles,” said Abhishek Jain, tax partner (auto), Ernst and Young.

“The FAME policy in 2015 further ignited the auto industry towards hybrids and most MNC firms had made serious investments and plans to launch many hybrids in India. The sudden push for electric vehicles without overtly mentioning hybrids and launch of GST with 43% on hybrids has sent a clear signal to the industry that India will move towards EV and may look at the hybrids in between,” analysts at Feedback Consultancy observed.

Union power minister Piyush Goyal said the government is not too interested in promoting hybrid cars as they save little fuel and so the cess has been increased on these cars. “The government is more interested in promoting electric cars as the future is in these cars,” Goyal said.

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