Sport Utility Vechicles, mid-sized, large, and luxury cars will cost more as the GST (Goods and Services Tax) Council has approved a proposal to hike cess on them to 25% from 15%. Under the new GST regime, these cars attract the top tax rate of 28%. On top of this, a cess of 1-15% is levied on them to create a corpus to compensate the States for loss of revenue from GST implementation.

The reason for this, according to the GST Council’s Fitment Committee, was that the post-GST tax incidence on motor vehicles across most categories was significantly lower than the pre-GST tax.

“The GST Council... recommended that the Central Government may move legislative amendments required for increase in the maximum ceiling of cess leviable on motor vehicles falling under headings 8702 and 8703, including SUVs, to 25% instead of the present 15%,” the government said in a release. “However, the decision on when to raise the actual cess leviable on the same will be taken by the GST Council in due course.”

‘Highly disappointed’

“We are highly disappointed with the decision,” Roland Folger, MD & CEO, Mercedes-Benz India, said in a statement. “We believe this will be a strong deterrent to the growth of luxury cars in this country. As a leading luxury car maker, this will also affect our future plans of expansion under the ‘Make in India’ initiative.”

“With this hike in cess, we expect the volumes of the luxury industry to decelerate, thus offsetting any growth in the potential revenue generation that could have come with the estimated volume growth,” Mr. Folger added.

The GST Council, however, argued that the hike in the cess was justified as it only brought the current tax incidence in line with what existed before GST.

“The difference in tax incidence calculated earlier and now is primarily on account of the fact that earlier the value based on which the tax incidence was estimated was inclusive of excise duty, while it should have been value net of VAT as well as excise duties,” a GST Council document reviewed by The Hindu said.

“Net of 28% GST, to maintain the pre-GST tax incidence, the highest compensation cess rate required will be 26.5%, based on tax incidence estimated with reference to assessable value for excise duty and dealer’s margin,” the document added. “Further, if the tax incidence is estimated on value not including dealer’s margin, the maximum rate for compensation cess will increase accordingly.”

States’ compensation

“The purpose of the cess is to compensate the States for any loss,” Pratik Jain, Partner and Leader of Indirect Tax at PwC India said. “It might have been better to first see how much loss, if any, is being incurred by the States, before deciding to change the rates of the compensation cess.”

When contacted, the Society of Indian Automobile Manufacturers declined to comment.

Vehicles in the category

Category 8702 comprises “motor vehicles for the transport of 10 or more persons, including the driver”, while Category 8703 comprises “motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 8702) including station wagons and racing cars (other than cars for physically handicapped persons)”.

The vehicles that fall under these two categories include mid-segment, large cars, SUVs and motor vehicles which can carry more than 10 persons but less than 13.

Also, hybrid vehicles with engine capacity of more than 1500 cc and mid segment hybrid cars of less than 1500 cc fall in the category.

The highest pre-GST tax incidence on motor vehicles worked out to about 52-54.72%, to which 2.5% was added on account of the CST, octroi etc. Against this, post-GST, the total tax incidence came to 43%.

Prices of most SUVs were cut between ₹ 1.1 lakh and ₹ 3 lakh following the implementation of GST, which subsumed over a dozen Central and State levies from July 1.

While all cars attract a peak GST rate of 28%, large motor vehicles, SUVs, mid-segment, large, hybrid cars and hybrid motor vehicles attract a cess of 15% on top of it. Small petrol cars of less than 4 metres and 1200 cc are marked for a cess of 1% while small diesel cars of less than 4 meters and 1500 cc engine are levied a cess of 3%.

The cess collected on cars as also tobacco and coal will be used to compensate the revenue loss of the States by implementing the GST. For this, a separate statute has been passed by Parliament. This prescribes the maximum cess rate.

And now, to change that cess rate, an amendment to the Schedule to section 8 of the GST (Compensation to a State) Act, 2017 will be needed.

(With inputs from PTI)