New Delhi: Small and mid-sized cars may see a small hike in prices after the Goods and Services Tax (GST) is rolled out from 1 July as different goods are fitted into the four-slab rate structure.

The GST will unify at least 10 central and state taxes into one. Goods and services will have to fall into one of the approved four rate categories of 5, 12, 18 and 28%, which is closest rate to the present incidence of taxation.

Small cars currently attract a 12.5% central excise duty. Another 14.5-15% VAT is levied by states, taking the total tax incidence to 27-27.5%.

A senior finance ministry official said the closed slab for this category of cars would be 28%, resulting in a small increase in price. Mid-sized cars of up to 1500 cc are levied with a 24% excise by the central government and a 14.5% VAT by state governments, taking the tax incidence to 38.5%. So this category of vehicles will attract the highest tax rate of 28% and a state compensation cess to take the total incidence closer to the current levels, the official said.

The GST law provides for levy of cess on top of the peak tax rate on demerit and luxury goods like pan masala, tobacco and certain class of automobiles to create a corpus that will be used to compensate states for loss of revenue arising on account of the implementation of the GST in first five years.

The official said a cess of up to 15% is provided in the GST Compensation Law and the final incidence of taxation would be arrived at adding the same to the peak rate. The cess would be levied in a manner so as to keep the final incidence of taxation at close to current levels, he said.

For SUV and bigger cars of more than 1500 cc, the current incidence of taxation is 41.5% to 44.5% (comprising of 27-30% of central excise and the remaining 14.5% being state VAT).

The official said these class of vehicles would be put in the peak 28% tax bracket and maximum 15% cess. This would take the total incidence of taxation to 43%. This means that for a select few vehicles, the tax incidence would be marginally lower than at present and would thus result in lower prices if the manufacturer passes on the benefit to the consumers.

Dubbed as the biggest tax reform since Independence, the GST is to unify at least 10 indirect taxes into one to be collected at state and central levels. Under the existing structure, the central government levies a production tax, called excise duty, and the state government charge a sales tax called VAT. These two will unify in the GST.

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