Will the hike in cess on luxury cars, SUVs end the twists and turns in tax policy for auto sector?

The Goods and Services Tax Act when conceived had a whole lot of good reasons to enact. It was expected to make the tax system simple, enable seamless trade or exchange of goods and services, bring the nation under one tax rate, make logistics and supply chain more efficient, bring down cost of goods and services, increase GDP and bring about ease of doing business. This appeared to be one masterstroke, which could turn the whole economy pink and bright. With all the intended goodies, the GST was finally rolled out after many a false alarm, hurdles and hiccups.

The auto sector was eagerly looking for the implementation of GST for the attendant benefits mentioned earlier. The sector has been going through a few tumultuous past years and was keenly waiting for the GST rollout to kick start and or propel growth to a higher trajectory.

When the final rates were announced in June 2017, there was a sweet surprise/ intrigue. For one, the base rate finalised for the sector was mostly in line with the expectations (the base rate was 28 percent with the exception of electric vehicles at 12 percent).

Two, the element of cess was the variable and it also was broadly in agreement with the calculated guesses of the industry. This was classified under three buckets – compact cars with engine of less than 1.2 litre, whether driven with petrol, CNG or LNG and not exceeding 4 metre attracted a levy of 1 percent; diesel passenger vehicles with engine capacity not exceeding 1.5 litre and under 4 metre attracted 3 percent levy; all other passenger cars falling outside the above category passenger cars, which included luxury cars and SUV, were levied a 15 percent cess.


This last category of cess was a sweet surprise since most luxury cars, which were hitherto attracting a consolidated effective maximum tax rate of 52-55 percent seemed suddenly cheaper by around 10 percent, being the delta of the effective maximum rate of 43 percent under GST to the maximum effective rate pre-GST.

On the same vein it also brought a category of those cars which were above 1,200 CC and 1,500 CC engine capacity and also above 4 metres in the august category of ‘luxury cars’.

Whether this was done with a socialist fervour of bringing mid-size car owners in the category of owners of luxury cars or to have many middle class aspiring citizens in a touching distance of owning a luxury car, one can’t tell. While the consumer or buyers of this category of cars would have every reason to be excited getting classified as elitist, it certainly brought into fore the inequity of having a tax rate equal to that of a luxury car. The prospect of losing additional tax revenue from luxury cars was warranting a relook at the cess rates sooner or later.

Once the rates and cess were announced followed by a clear indication on the part of the government to roll out on 1 July, 2017, the automakers and dealers were left with the task of disposing the stock in hand to not land up with the hassle of not being able to claim input credit on certain taxes paid prior to GST.

The famous Adi sale (not Audi; this is like a Black Month sale or a Black Friday sale) arrived on the scene a month earlier ensuring post-GST prices since the new tax regime was expected to bring down the cost of ownership of vehicles. Encouraged by this scenario, the auto industry in general and the luxury and SUV makers in specific were without any hint of doubt expecting the growth levels of their business to be healthy and not anaemic. Different strategies and plans were discussed without much ado to either increase capacity or look at new investments expecting the markets to respond leading to a decent double-digit growth. The sector was looking energetic and post the GST had shown good results and was looking forward to a great year. Clearly, the slightly lower tax, the industry expected will help them take a shot at a larger market.

As mentioned earlier, the anomaly of a deep discount on the tax for luxury cars turned out to be an eye sore in as much as slipping the revenue generating capacity of the state exchequer and this had to be set right. The GST Council in early August decided to levy additional cess of 10 percent. The monsoon session of Parliament was just coming to an end and did not present the government with the opportunity of bringing in the amendments.

Despite the auto sector crying hoarse, an ordinance has been promulgated by the Cabinet to increase the cess by 10 percent; from 15 percent to 25 percent for luxury cars and SUVs in order to plug any loss of revenue quickly. It is understood that the next GST Council will decide the modalities for implementation and move on. The government probably doesn’t want to be seen as elitist, which could be one reason for this change in stance.

It is clear that the anomaly which had crept in earlier is corrected by this additional levy bringing the category of luxury cars and SUVs to the pre-GST level of taxes. This would not seriously impact the pricing viz, pre-July 2017. However, this has seriously put a spanner in the works for the luxury and SUV segment that had different plans and expectation on their growth performance. This will seriously pose a challenge for them since over the last year or so there have been many flip-flops in policy especially for the auto sector.

The expectations now are that the government use this situation in clearly setting the rules and come out with clarity on what constitutes luxury car and what is an SUV, primarily with the intention of addressing the concerns of manufacturer and owners of mid-size cars.

This is an opportunity to get everything right. Lastly, true to one of the edicts of GST of bringing in affordability of goods and services, I would reckon the government would not apply the entire 10 percent additional levy for luxury cars in turn enabling people like me with aspirations of owning a luxury car.

(The author is partner, Grant Thornton India LLP. Views expressed are personal)

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