New Delhi: The Union Cabinet on Wednesday approved an ordinance enabling the government to raise the goods and services tax (GST) cess on medium-to-large cars and sport utility vehicles (SUVs) to 25% from 15%.

The ordinance is expected to precede a 9 September meeting in Hyderabad of the GST Council, the federal body that decides on all indirect tax matters. At the meeting, the council may decide where to finally fix the cess, which is now at 15%.

Prices of most SUVs were cut by between Rs1.1 lakh and Rs3.5 lakh after the GST rollout on 1 July. As a result, car market leader Maruti Suzuki India Ltd’s domestic sales rose 22.4% in July from a year ago. Sales at Mahindra and Mahindra Ltd and Toyota Kirloskar Motor Pvt. Ltd grew 21% and 43%, respectively in July. Any upward revision in cess will lead to an increase in prices of bigger vehicles.

Finance minister Arun Jaitley, who briefed reporters about the cabinet decision, said the approval was for an ordinance to amend the GST (Compensation to States) Act, 2017, to increase the statutory limit on the cess on some motor vehicles. The cess will help the Centre compensate states for any revenue loss during the first five years after the implementation of GST.

Accordingly, the upper limit of cess that can be imposed by the government on motor vehicles with a capacity to carry 13 people, vehicles with 10-13 people capacity, mid-segment cars with engine capacity less than 1500cc and large segment cars with higher engine capacity, SUVs and hybrid vehicles, will go up to 25% once the ordinance is promulgated. The upper ceiling on small petrol and diesel cars less than 4 metres long, which currently attract cess of 1% and 3% respectively, remain unchanged. Motor vehicles attract a GST of 28% besides the applicable cess. “It does not mean that the cess will automatically go up from 15% to 25%. It (the Ordinance) only is an enabling measure. The GST Council, is entitled to take a decision on whether it needs to increase the cess within the cap," said Jaitley, who also chairs the council which has state ministers as members.

The move is aimed at restoring tax revenue from the automobile industry that got affected when the federal indirect tax body fixed the cess at the current level, leading to price cuts across various models in the initial days of GST’s rollout.

Roland Folger, managing director, Mercedes-Benz India Pvt. Ltd, said that if at all such a move was required, a review could have been taken after six months when the outcome of GST regime would be clearer.

“In any case, the hurry to implement the hike in cess is frankly quite surprising to us. What we understand from the press reports is the fact that the collection of tax has been above expected and it would have been ideal to give the industry more time to analyse the outcome of GST on our business," Folger said.

Pawan Goenka, managing director of Mahindra & Mahindra Ltd, said the move is on expected lines. “What is critical to the industry is when, how much and on what criteria will the cess be increased. Industry has made a representation to the government and we await the final decision," he added. The hike in cess is just one among a slew of other surprises that have upset auto firms.

There have been several—including a higher rate on environmentally friendly hybrid cars, an eight-month ban on large diesel vehicles by the Supreme Court in 2015 and the advancement of the deadline for Bharat Stage VI emission norms to 2020 from 2022.

Makers of SUVs and luxury cars have criticized the GST Council’s plan to raise cess, warning the move will lead to production cuts and job losses and dent the ‘Make in India’ initiative. The government says the intention of implementing the tax reform was not to reduce the tax burden on items like luxury cars and tobacco.

“If at all a relief (in tax burden) is to be given, it should be given to products consumed by the common man," said the finance minister, adding that a person who can afford a car priced at Rs1 crore would not mind buying it for Rs1.02 crore.

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