GST: Small cars to become costly, SUVs, 2-wheelers benefit

Aamir H Kaki 

Under the new goods and services tax (GST) regime, the luxury cars will become cheaper and for buying small cars the buyers have to shell out a little more. 

Luxury cars, sports utility vehicles (SUVs) and larger sedans would be benefitted from some rationalisation in tax structure as even after a 15% cess on the total levy, it will be lesser than the tax currently being levied on such models.  

Under the new tax regime, there will be a uniform rate of 28% on cars, unlike the multiple rates of tax levied presently. An additional cess of 1% and 3% is being discussed to be imposed on small cars of petrol and diesel, respectively.  

Larger cars and SUVs are likely to attract a 15% cess over the uniform base rate of 28%, to recover the loss on revenues due to the implementation of GST. Currently, the tax range is between 25% and 55%.  

The tax rates were released on Thursday after the GST Council’s meeting. 

As per the current tax structure, small cars are levied with an excise duty of 12.5% and another 12.5-14.5% for value added tax (VAT). The proposed base rate of 28%, with an additional cess of 1-3%, could take up the overall total levies to 29-31%, resulting in increased prices of small cars - a price-sensitive segment.  

For luxury cars, SUVs and cars with 1500 cc engines and more, the current rate of taxation is 41.5% to 44.5%, including 27-30% as central excise and the remaining is state VAT.  

The present four-tier classification of excise duty is based on the aspects of the vehicle’s length and its engine capacity (varied for diesel and petrol cars). In the new GST regime, it is supposed that cars have just three layers of cess, while having the uniform duty structure of 28%.  

However, the automobile manufacturers could not still clarify how the vehicle prices of would change. 

“The proposed GST is understood to have three slabs and a cess instead of the existing four-tier excise duty structure. Given the information available to us, it seems that entry level cars could see an escalation in taxes, leading to certain increase in prices,” said Rakesh Srivastava, Director (sales & marketing) at Hyundai. 

However, R C Bhargava, Chairman, Maruti Suzuki, said that there is still lack of clarity in the taxation rates. 

“Since we do not know the rate of cess, the calculation cannot be done,” Bhargava said. 

In two-wheelers segment, motorcycles with engine capacity of more than 350 cc will also attract a cess along with the base tax of 28%. The cess has been kept at 3%, taking the total rate of taxation to 31%. Currently, the two-wheeler sector attracts around 13 different types of taxations, making the rates between 28-35%. 

On the other hand, the industry is also waiting to get clarity on the taxation rates on the auto component manufacturers. Vinnie Mehta, Director General, Automotive Component Manufacturers Association of India (ACMA) told The Dollar Business, “Since there is no clarity as yet on the rate of GST for auto components industry, we have asked for an intermediary rate – if the vehicle industry is taxed at 28%, then we believe the taxation for auto component should be kept at a moderate rate of taxation - of 18%. 

Citing the reason to be put in the lower tax bracket, Mehta said, “Our sector deals in intermediary goods that not only comprise OEM players but also a significant number of players representing the huge aftermarket.” 

With a lack of clarity on how the government will define small and large cars, we will have to wait and watch till the haze would clear on the issue. It has to be seen if the government will stay with the present definition that generates a 4-metre divide or will it choose for price tags/engine capacities as the measure of classification, before the new GST regime can set in.