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Will The GST Rate Of Over 28% Give A Boost To Car Sales?

The finance ministry has finally announced a uniform rate on 1,211 items that will be levied from 1 July 2017 under the goods and services tax bill. But before the simplified taxation system arrives, BW Businessworld did a deep-dive study to discern whether the rates are actually industry-friendly and will go a long way in giving a fillip to sales

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The finance ministry has finally announced a uniform rate on 1,211 items that will be levied from 1 July 2017 under the goods and services tax (GST) bill. But before the simplified taxation system arrives, BW Businessworld did a deep-dive study to discern whether the rates are actually industry-friendly and will go a long way in giving a fillip to sales.

While there was a unanimous view that the new taxation structure under GST will be a boon as it will replace multiple state and central taxes with a single levy, a majority of them reckoned there will not be a massive resurgence in volumes, especially in the mass market (small car) segment. Unsurprisingly, cars come under the ‘luxury goods’ bracket and will attract (the highest rate) 28 per cent GST. Over and above, an additional cess of 1, 3 or 15 per cent is proposed, depending on the classification of cars.

Prices of small cars, which accounts for over 50 per cent of the market share, will be static as their will be a minor hike in the duty under GST. This will include the 28 per cent rate as well as a cess of 1 per cent for small petrol cars (with engine higher than 1.2 litre) and 3 per cent for small diesel cars (with engine bigger than 1.5 litre).

RC Bhargava, chairman of Maruti Suzuki, said, “I don’t see a huge jump in volumes for personal vehicles (PVs) with the announcement of the rates. Having said that, there will neither be a drop in numbers as the rates for small cars at (28+1) more or less remains the same as compared to the previous multiple duties such as excise duty, sales tax, etc., that were levied earlier. There is a little bit of ambiguity pertaining to hybrid cars as no specific subsidies have been offered on that front. We are holding discussions with the government in this regard and are hopeful of coming out with a resolution.”

However, premium car buyers will be the key beneficiaries of the new rates as it will reduce the effective duty on such models. Currently taxed at 52-55 per cent, it will be coming down to 42-45 per cent under GST.

Roland Folger, CEO and managing director, Mercedes-Benz India, in an emailed response stated, “We are waiting for an official notification on the GST rates and currently studying the effects that might emerge out of its implementation. We are hopeful that GST is a step towards creating the much required consumer demand for the luxury car industry, which has de-grown in 2016.”

The Society of Indian Automobile Manufacturers has welcomed the new GST rates on automobiles. As its president Vinod Dasari puts it, “The rates are as per the expectations of the industry and almost all segments of the industry have benefitted by way of a reduced overall tax burden in varying degree. This will pave the way for stimulating demand and strengthening the automotive market in the country, paving the way for meeting the vision laid down in the Automotive Mission Plan 2016-26. The government has done well to ensure stability in taxation while at the same time moderating the taxes wherever they were too high.”

However, many companies such as Toyota, Mahindra, Maruti which have come out with environment-friendly vehicles were disheartened as they were hoping for a differential duty for cleaner vehicles.

“The government has always encouraged environmentally friendly technologies and with the current focus on reducing emissions of greenhouse gases and reducing carbon footprint one would have expected the lower taxation to continue on such vehicles in a technology agnostic manner,” Dasari added. “The inclusion of 10-13 seater vehicles used mainly for public transport in the same tax bracket as luxury cars with a 15 per cent cess is also unexpected and may merit a review.”

Shekar Viswanathan, vice-chairman and director – Toyota Kirloskar Motor, said, “The government of India should review the proposed tax structure for greener vehicles such as electric, hybrid, etc., to achieve cleaner mobility solutions. We do hope the government will continue to extend the prevailing tax benefits for greener technologies which are purely based on the fuel efficiency and eco-friendliness. However, the government needs to understand that ‘strong hybrid vehicles’ share the same eco-system with pure electric vehicles and therefore denying the same benefits extended to electric vehicles is being short sighted.”

Sarika Goel, tax partner, EY, revealed, “I think if one takes all the current taxes that apply on cars including excise duty, infra cess, CST, VAT, etc., the incidence on small cars would more or less remain the same. The tax incidence on large cars and SUVs could reduce to some extent under GST. The government needs to take a relook at the rates for hybrid vehicles (which has been put at the highest bracket of 43 per cent) if it wants to encourage production and purchase of such cars.”

The bottom line is that despite being one of the most promising contributors to economic growth, the PV industry has been facing the whip of increased tax rates and multiple cesses for a substantial time now and even GST doesn’t seem to provide any cushioning. Most of them maintained that the highest slab rate of 28 per cent on all categories of vehicles, regardless of the engine capacity or length, doesn’t look industry-friendly. Likewise, parts and accessories for such automobiles have also been placed in the same bracket.

Gautam Khattar, partner - indirect tax, PwC, shared, “The government seems to have deviated from its earlier stand of introduction of cess only on luxury goods, the current rates indicate a slab (ranging from 1-15 per cent) of cess on all vehicles. The electric vehicles seem to get the required relaxation; surprisingly hybrid vehicles have also been included in the 28 per cent bracket, along with the highest cess of 15 per cent. In comparison, tax on electric vehicles has been kept at 12 per cent. Given the above rates, the industry may not see much tax influence on the price fluctuation for the end customers as the taxes land up in the same bracket as under the current regime.”


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