The post-goods and services tax (GST) cess on SUVs and other luxury cars is set to be hiked from 15% now to 25% or thereabouts, a move that could dent the businesses of automakers either through additional tax burden or reduced sales volumes. The impact will be felt more by Mahindra & Mahindra, Toyota Kirloskar Motor, Mercedes Benz and Skoda which have a larger share of big cars in their portfolios. The higher cess will also apply to race cars and and other vehicles carrying 10 or more persons. The stocks of M&M and Tata Motors fell 1.3% and 1.07%, respectively, on Monday. For the government, the move will yield a revenue windfall, much of the same magnitude as the Rs 5,000 crore extra it would rake in annually from the increase in specific (non-ad valorem) cess on cigarettes announced on July 17. The hike in the so-called compensation cess cap on select motor cars was recommended by the GST Council at its 20th meeting here last week. The Centre will now have to move an amendment to the relevant law in Parliament to carry out the proposal. The cesses are applicable on a clutch of “demerit goods” including tobacco, pan masala, aerated drinks and luxury cars, all of which also attract the highest GST rate of 28%. If the entire room available after the hike in cess ceiling is utilised by the government, the tax on the specified large cars will increase from 43% now to 53%. The move could impact all cars that have a platform length above 4 metres, which account for a third of the volume of domestic car sales, industry sources said.
Analysts, however, said significant rate changes within a month after the GST was rolled out signalled that major rate adjustments could be on the cards for other items as well. The situation, they said, had arisen as the government had to hurriedly take decisions on rates in the last few days of June, adding that what the industry and investors wanted was stability on the tax front. “The process of rate adjustments might continue,” Satya Poddar, senior tax adviser at EY, told a TV channel. Earlier, sources from the GST Council had told FE that several proposals for rate changes have come up from states and these would be considered by the council at its next meeting to be held in Hyderabad on September 9.
Roland Folger, MD and CEO, Mercedes-Benz India, said: “We are highly disappointed with the decision. We believe this will be a strong deterrent to the growth of luxury cars in this country. As a leading luxury carmaker, this will also affect our future plans of expansion under ‘Make in India’ initiative.” He added: “With this hike in cess, we expect the volumes of the luxury industry to decelerate, thus offsetting any growth in the potential revenue generation, that could have come with the estimated volume growth.” According to Folger, the proposal to increase the cess clubbed with the increased road tax rates, would take the effective consumer price much above the pre-GST scenario level.
“The message that we are getting from the government from such a move is that it is not looking at the auto sector to spur economic growth,” Toyota Kirloskar vice-chairman and whole-time director Shekar Viswanathan told PTI, adding that increasing cess on large cars and SUVs will “selectively benefit some companies, while putting others at a disadvantage”. Rajat Mohan, partner at consultancy AMRG & Associates, said: “We also have to acknowledge that chief economic adviser in his report recommended one demerit rate for luxury cars at 40 %… Any further increase in cess could hit the luxury car demand and further force companies to control production and supply.”
Bipin Sapra, partner, indirect tax, EY, said: “The government probably wants the flexibility of a higher cap on cess at 25% but it’s likely that they may use it for luxury and race cars and not for sedans that are also in the same category of motor vehicles. The use of the cap may to be to increase the differential between these two types of cars as was the case under the central excise regime.” The finance ministry said in a statement on Monday: “It was noted that after introduction of GST, the total tax incidence on motor vehicles (GST + compensation cess) has come down vis-a-vis the total tax incidence in pre-GST regime.” Even as the ministry said legislative amendments were on the cards to raise the ceiling of cess leviable on “motor vehicles falling under headings 8702 and 8703 including SUVs, to 25% instead of present 15%”, it added that a decision on when to raise the cess will be taken by the GST Council in “due course”.
The proceeds of the cesses in the GST regime are meant to be used to compensate state governments for any revenue loss due to GST. The relevant Act makes it incumbent on the council to fully compensate the states for the revenue loss in the first five years after GST roll-out. The revenue loss will be calculated with 2015-16 base (14% annual growth from this base will be ensured). Acceding to demands from the industry, the council on Saturday decided to reduce the GST rate on all job works related to the labour-intensive textile-and-apparel sector to 5% from 18%. Besides job workers in dyeing, knitting, texturising and embroidering, etc, the tax cut will benefit thousands of small textile/garment units. In a move that would cut the cost of project execution in the government sector, the council also reduced the GST on work contracts in the state sector to 12% from 18% with full input tax credit.