The hike in Goods and Service Tax (GST) cess on luxury cars and SUVs from 15 per cent to 25 per cent will see a commensurate increase in prices of the cars and is likely to result in a deceleration of the industry.
Luxury cars and SUVs were one of the biggest beneficiaries of the unified GST regime that came into force from July 1 this year, as even with the 15 per cent cess, the overall taxation on the category had come down by 10-12 per cent. Companies like Mercedes, BMW, Audi, Jaguar Land Rover and Toyota had quickly reduced prices and there was some uptick in demand in the last few months as a result of that. With the government now resorting to status quo from the pre GST era, it puts the industry back to square one.
“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,” says Rahil Ansari, Head, Audi India. “This is bound to adversely impact sales by possibly a double-digit reduction and will consequently reduce revenues for the company, dealers and perhaps also tax revenues for the Government. While the overall impact will still have to be evaluated in some time, we will be forced to redraw our plans for the Indian market based on future projections in this scenario.”
Though the volumes in the luxury car industry in India is small at just 1 per cent of the overall car sales in the country, its contribution in value terms is significant at over 10 per cent. In the last few years however sales have stagnated at around 35,000 units per annum as the slugishness in the overall economy and high taxation has throttled demand. Under GST, the industry was hoping for a boost and a relief from the annual flip flop from taxation in the budget. The reversal in less than two months of the implementation of the tax has dismayed many.
“In any case, the hurry to implement the hike in Cess is frankly quite surprising to us. What we understand is that the collection of tax from GST has been above expected and it would have been ideal to give the industry more time to analyze the outcome of GST on our business,” says Roland Folger, MD and CEO, Mercedes Benz India. “The Automotive segment has not even settled in, to see the effect of the marginal relief in terms of rationalization of taxes in the GST regime. Prior to this, the proposed increase in Cess has surprised the entire luxury car industry. If at all it was required, a review could have been taken after six months when the outcome of GST regime would have been clearer. This decision, contradictory to the requirement of creating a sustained demand for the luxury car in this market, would rather affect the growth momentum adversely.”
The chances of more cess and layers being introduced under GST in the days to come, just as the industry is getting ready for the festive season, has dampened spirits.
“While the ordinance sets right the anomalies which crept in while the rates were finalized for the passenger car segment in early June, the additional 10% cess will have a dampening impact on the otherwise increased demand expectation for luxury cars and SUV, which in recent times have been picking up,” says Sridhar V, Partner, Grant Thornton India LLP. “The government is expected to come up with more clarity if it intends to have a couple of more levels of cess within the overall cess of 25%.”
The expected decline in sales, if true, may also result in lower revenue realization for the government even with the higher tax on a per car basis.
“We request the GST Council to carefully evaluate the negative impact on this and, if a decision is taken on a 10% cess increase, postpone the implementation for another 6-12 months to evaluate the real impact of the GST on the automobile sector, in particular the luxury segment,” says Ansari of Audi India. “This will surely prove that the overall effect with a lower cess percentage of 15% is generating higher tax revenues than expected.”