Bend in The Road: Tax Burden on Bigger Cars May Not Exceed 50%
GST Council to decide on quantum of increase
New Delhi: India is unlikely to allow the total tax incidence on midsized cars, large cars and SUVs to exceed 50%, which means imposing a cess of less than 25%. That should partially alleviate the fears of car makers, some of which have complained about an increase in the cess forcing them to raise prices after having just dropped them following the rollout of the goods and services tax (GST) on July 1.
The finance ministry is likely to move a cabinet note over the next two days for amending the GST compensation act to raise the cess on such vehicles to 25% from 15%. The actual increase, which has to be decided by the GST Council, is likely to be less to keep the overall tax incidence below 50%, a top official said. Automobile companies have protested against the proposed increase and many may roll back price cuts announced after GST lowered the effective tax.
In the pre-GST regime, the effective tax on mid-sized sedans was around 47% and that for SUVs over 55%.
“The cap is being raised to enable governments to raise tax rate as and when needed... Increase will also not be effected at one go,” the official said, adding that the GST Council will take a final decision on the quantum of the increase.
After GST was put in place, auto companies had cut prices of most large cars and SUVs by Rs 1.1 lakh to Rs 3 lakh. GST subsumed 17 central and state taxes including excise duty, service tax and value added tax and 23 cesses and provides for seamless flow of input tax credit. The amendment in the GST compensation act to increase cess can be carried out by an ordinance if legislation is not passed in the current monsoon session, which ends August 12. The GST rate on mid-sized cars, large cars and SUVs is 28% and with the cess — imposed to collect revenues for compensating states — swells to 43%. If the cess is raised to 25% from 15%, the total tax incidence would go up to 53%.
As per the proposal, vehicles that fall under the tariff headings 8702 and 8703 in- cluding mid-segment, large cars, racing cars, SUVs and motor vehicles that can carry more than 10 persons, but less than 13 such as station wagons, will be impacted by the move. Also, hybrid vehicles with engine capacity of more than 1,500 cc and midsegment hybrid cars of less than 1,500 cc fall in the category facing higher cess. The GST Council had on Saturday empowered the Centre to raise the cess to 25% from 15% for certain types of vehicles.
The total tax on motor vehicles (GST plus compensation cess) has dropped from what it was before the levy was rolled out on July, the finance ministry had said on Monday in a statement. An increase in cess will help the government raise revenue to pay compensation to the states for any revenue loss due to GST, it had said.