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Hike In Cess Rates On Mid-Size And Luxury Cars To Decrease Demand

Luxury auto makers in India fear that demand will go down if cess on cars increases. Currently the government plans to increase cess from 15 percent to 25 percent. Arshad Khan reports

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India’s auto sector, which welcomed the new tax reform the Goods and Service Tax (GST), is now raising serious concerns over the government’s decision to revise the cess rates. As per reports, the GST Council has recommended the government to move legislative amendments required for increasing the “maximum ceiling of cess leviable on motor vehicles to 25 per cent instead of present 15 per cent.”

The move will increase prices of mid-size, SUVs and luxury vehicles which at present is attracting a compensation cess of 15 per cent (plus 28 per cent GST) to their previous price level or even more when total taxes in big vehicles where 52-53 per cent.

The automakers had earlier cut prices up to Rs 3.5 lakhs on SUVs which resulted strong demand for vehicles in July. Sales at Mahindra and Mahindra and Toyota Kirloskar Motor grew 21 per cent and 43 per cent respectively while luxury carmakers also witnessed a jump in demand.

Post the announcement that cess will be revised, the companies are now worried that there will be a dent on demand and they will have to rethink about their future plans for India.

Mercedes-Benz, India’s leading luxury carmaker said that the new decision will affect their future plans of expansion under 'Make in India' initiative.

"We are highly disappointed with the decision. We believe this will be a strong deterrent to the growth of luxury cars in this country. We feel deprived as the leading manufacturer of luxury cars in India, who has been championing 'Make in India',” Mercedes-Benz India MD and CEO Roland Folger said.

He added that the decision will also reverse the positive momentum that the industry wanted to achieve with the introduction of GST.

“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,” Folger said.

Toyota Kirloskar, the maker of popular Innova and Fortuner said the new move will impact production and jobs. “This move will impact production and jobs. I am surprised. I have no face to show to our principals in Japan,” Shekar Viswanathan, vice-chairman of Toyota Kirloskar Motor Pvt. Ltd, said.

Audi India also believes that the decision will dampen demand and they will be forced to re-evaluate their business plans in light of this development.

“Increasing the cess on the luxury car industry will dampen the spirits of not only the companies, dealers and customers but also workers and employees working in this industry. We will be forced to re-evaluate our business plans in light of this development," said Rahil Ansari, Head Audi India.

Not just the bigger vehicles, mid-size vehicles like Honda City, Maruti Suzuki Ciaz will also be affected by the decision. Hybrid vehicles with engine capacity of more than 1500 cc and mid segment hybrid cars of less than 1500 cc also fall in the category. The hike in cess will make them fall in the luxury car segment.

Placing a commuter car like Honda City or the Maruti Suzuki Ciaz in the same tax bracket of luxury cars is not right. The government should rethink the decision,” a senior executive said requesting anonymity.

Not the First Time

This is not the first time when a government’s decision is not welcomed by automakers. Earlier this year when the government announced that it aims to have only electric vehicles on road by 2030, carmakers questioned the ambitious target. “It will be very difficult for the industry to change things from tomorrow. I have never seen that kind of a change in the world,” Kenichi Ayukawa, MD and CEO, Maruti Suzuki India said in May, 2017. Other carmakers also questioned the sudden announcement and infrastructure available in the country to support EVs.

Government’s sudden decision to ban high value currency in November last year impacted sales of automobiles in the coming months. Many automakers expressed their concerns on the falling demand during initial months. Supreme Court’s decision to ban the registration of luxury automobiles and sport utility vehicles with an engine capacity in excess of 2000cc in NCR in December 2015 also led to several hard criticism by automakers who had invested in diesel technology.