GST Council recommends 10% hike in cess on SUVs and large cars

The upcoming festive season for the Indian passenger vehicle industry may not be a bright one. GST is not turning out to be exactly good and simple for Indian OEMs.  

The big-ticket 12 percent GST-driven taxation relief – the highest among all vehicle segments – afforded to the SUV segment and 8.6 percent to large cars (more than 4 metres long and with over 1.2L petrol and 1.5L diesel engines), which came into effect from July 1, is set to come to an end, barely a month after coming into effect.  

Autocar Professional learns that a key reason for the revision of the cess is due to the large compensation packages (due to 28 percent GST plus 15% cess) that the Centre will have to offer state governments.      

In an official statement issued today, the government said the GST Council has recommended an increase in the maximum ceiling of the cess on motor vehicles in two categories.

The statement reads, "The GST Council considered the issue of cess leviable on motor vehicles in its 20th meeting held on the 5th of August 2017 and recommended that Central Government may move legislative amendments required for increase the maximum ceiling of cess leviable on motor vehicles falling under headings 8702 and 8703 including SUVs, to 25% instead of present 15% . However, the decision on when to raise the actual cess leviable on the same will be taken by the GST Council in due course. 

"It was noted that after introduction of GST, the total tax incidence on motor vehicles [GST + Compensation Cess] has come down vis-a-vis the total tax incidence in pre-GST regime. The Schedule to the Goods and Service Tax (GST) (Compensation to State) Act 2017, specifies the maximum rate at which Goods and Service Tax Compensation Cess may be collected. In respect of motor vehicles, the maximum rate at which Goods and Service Tax Compensation Cess may be collected is 15%." 

The official notification for the 10 percent hike in cess is likely to be on September 9, following a GST Council meeting in Hyderabad.

Taxing policy
The new tax regime promised to improve the ease of doing business in the country. The latest cess update it seems will only serve to further stress the already confusing environment prevailing for industry.

As part of GST guidelines, it was mandatory for OEMs to pass on the benefit arising out of GST to vehicle buyers. Now OEMs will be compelled to hike vehicle prices, leading to considerable customer dissatisfaction. 

It will also add to vehicle dealer woes; most dealers across the country have had to contend with the vexing issue of pre-GST stocks. Recently, Mahindra & Mahindra announced a provision of Rs 140 crores in its financial budget arising out of the pre-GST stocks left with dealers. Now with the proposed change in cess, it seems OEMs and dealers will need to revisit their stocks.

Blow to automakers
In the pre-GST era, while SUVs had to bear total taxation of 55 percent (comprising excise duty, cess and VAT), large cars had a tax component of 51.6 percent.

With implementation of GST, taxation on both SUVs and large cars dropped to 43 percent, which benefited SUVs by a good 12 percent and large cars by 8.6 percent. Now with the proposed 10 percent cess hike, the benefits to these two vehicle categories will be more or less nullified.

With the 10 percent hike in cess, taxation for both these vehicle categories will stand revised at 53 percent. This means while the pre-GST and post-GST tax differential will be a positive 2 percent for SUVs, it is a negative 1.4 percent for large cars. 

Clearly, the hike in cess, which will translate into a hike in vehicle prices for these two vehicle categories, will come as a huge dampener to manufacturers of UVs and large and/or luxury cars.

"Nobody is welcoming such a knee-jerk reaction. The market impact would not be significant if the proposed tax + cess slab was applicable right from July 1," says a senior official at an SUV manufacturer. The official also expressed concern about more such policy revisions.      

Speaking to Autocar Professional, Nikunj Sanghi, director – International Affairs & Global Relations, FADA, said: "The impact of the GST rate revision on the PV market will be significant."

July 2017, the first full month of sales after GST kicking in, saw most passenger vehicle manufacturers, from Maruti to Maruti, Toyota to Honda, report a smart uptick in sales, particularly for their popular SUVs. 

The latest GST ruling will also impact automakers like FCA India, which recently launched the Jeep Compass. The SUV's surprise launch price of Rs 14.95 lakh is set to go up by around 8 percent or so. 

Luxury carmakers like Mercedes-Benz, Audi, BMW, Jaguar Land Rover and Volvo too will feel the pressure, considering consumers had made a beeline to their showrooms in the past month, what with luxury car prices slashed by lakhs. 

Just when the going seemed to be good for the automobile industry, the latest GST Council update has put a spoke in the wheels of growth. Stay tuned for more updates.