Mid and large-sized luxury cars and SUVs are likely to cost more as the Cabinet on Wednesday approved the issuing of an ordinance to raise the GST cess on these vehicles to a maximum of 25 per cent, from 15 per cent at present.
Car prices had dropped by up to Rs 1.2 to 3 lakh following the implementation of the Goods and Services Tax (GST) from July 1 and the ordinance is being seen as an attempt to rectify the anomaly where prices of certain common use items had gone up while those of luxury cars had come down under under the new tax regime.
Finance Minister Arun Jaitley said the actual cess on different classes of vehicles and as to when it will be implemented is to be decided by the GST Council the next meeting of which is scheduled on September 9.
Jaitley said, "The objective of a taxation policy cannot be to make luxury items cheaper, and essentials costlier. If at all relief is to be given, it has to be given to a common man's item rather than a luxury item. So a person who can afford Rs 1 crore for a vehicle can also afford Rs 1.20 crore," he added.
Under GST, which replaced over a dozen central and state levies in the biggest tax reform since independence, cars attract the top tax rate of 28 per cent.
On top of this, a cess of 1 to 15 per cent is levied for the creation of a corpus to compensate states for any loss of revenue from implementation of GST. After the introduction of GST, the total tax incidence on motor vehicles (GST plus compensation cess) has come down when compared with the total tax incidence in the pre-GST regime.
The highest pre-GST tax incidence on motor vehicles worked out to about 52-54.72 per cent, to which 2.5 per cent was added on account of Central Sales Tax, octroi etc. Against this, post-GST the total tax incidence came to 43 per cent.
Presently, large motor vehicles, SUVs, mid-segment cars, large cars, hybrid cars and hybrid motor vehicles attract a cess of 15 per cent on top of 28 per cent GST.
"There are 12 different categories of automobiles and two categories are impacted by this decision to hike cess. These hikes are not across the board," Jaitley said.
Revenue Secretary Hasmukh Adhia said the categorisation of cars has not changed. Cars on which there was an excise duty of 27 or 30 per cent, those were luxury cars. There is no intention of increasing rate on any other car other than those which were put in luxury category and had very high excise duty and VAT," Adhia said.
Luxury car makers such as Mercedes-Benz, Audi and JLR on Wednesday said the proposed hike in cess on luxury cars and SUVs will adversely impact growth in the segment. Mercedes-Benz India MD & CEO Roland Folger said, "The automotive segment has not even settled in to see the effect of the marginal relief in terms of rationalisation of taxes in the GST regime,''
"Now, with this proposed measure, the luxury car industry is going to decelerate," he added.
Audi India Head Rahil Ansari said: "The taxes on this industry are already very high and this increase in cess rate will be detrimental to the luxury car industry as we will be forced to hike our prices to levels higher than pre-GST period."