Why hike in GST cess will have a limited impact on sales of mid, large cars, SUVs

Key highlights:

• Large luxury cars will have a GST cess of 48%
• The current GST rate of 48% means that it is just lower by 0.5% than the pre-GST levels
• Impact to be limited due to the hike in the GST cess rate

The GST Council's decision to increase the goods and service tax (GST) cess by up to 7% for mid-size cars, large cars and SUVs. This will be be added to the 15% cess charged on such vehicles over and above the GST of 28%.

The final tax on mid-size sedans will be 45% (28% GST + 17% cess), on large luxury cars it will be 48% (28% GST + 20% cess) and on SUVs will be 50% (28% GST + 22% cess).

The finance ministry did not fiddle with the cess on small, electric and hybrid cars and their rates will remain unaffected. The ministry also, however, did not define ‘luxury vehicles’.

The Central Board of Excise and Customs (CBEC) also notified that this increase in the effective rates of GST cess will be issued on Monday itself.

Automobile companies have already indicated that this increase in the GST cess will be passed on to customers in the form of price hikes.

While these car segments were the most to benefit in the previous GST rates, as it was much lower than the pre-GST rates. However, this latest hike in the GST cess has taken the tax on these car segments to the same pre-GST level tax rates, or even higher.

For instance, the mid-sized car segment previously incurred VAT of 14.5%, excise duty of 24%, CST of 2% and infrastructure cess of 4%. This brought the pre-GST tax total to 44.5%.

Now under the revised GST tax rates the total tax incurred by mid-sized cars in India will be 45%. This is 0.5% higher than the pre-GST level tax rate.

Large cars, on the other hand, incurred a VAT of 14.5%, 27% excise duty, 2 CST, 4% infrastructure cess and 1% luxury cess, added up to 48.5%. The current GST rate of 48% means that it is just lower by 0.5% than the pre-GST levels.

SUVs previously incurred a VAT of 14.5%, 30% excise duty, 2% CST, 4% infrastructure cess and 1% luxury cess, to add to a total of 51.5%. With the revised GST rate totaling to 50%, it is only 1.5% lower than the pre-GST level tax rate.

While automobile companies expect this change in the GST rate to have a negative impact on the car sales, the impact may be limited.

A recent CARE Ratings report expected that impact to be limited due to the hike in the GST cess rate.

“Post the initial interruptions and marginal price adjustments, we expect the impact to be limited given the inelastic nature of demand for luxury cars,” said the report.

It said that car prices had dropped by up to Rs 3 lakh as the tax rates fixed under the GST, which came into effect from July 1, were lower than the combined central and state taxes in pre-GST days. To fix this variance, the Council has raised the cess.

“In FY18, CARE Ratings expects passenger vehicles segment to witness gradual pickup in demand as the effect of demonetisation, ban on BS-III vehicles and GST implementation begins to moderate starting Q3 FY18. Also, demand is expected to improve on back of various initiatives taken by the government in the Union Budget 2018. Reduction in tax burden for individuals with income below Rs 5 lakhs is likely to have positive impact on the two-wheelers and cars demand. Also, improved consumer sentiments post the Seventh Pay Commission is expected to boost the demand,” the report said.

It says the main drivers of growth for car sales are the GDP growth of around 7%, repo rate decreased in the third bi-monthly monetary policy for this financial year, good monsoon season and higher farm income, and higher income levels and consequently higher disposable income.

ALSO READ:

• Car sales continue robust growth in August: SIAM
• Car makers may hike prices soon with rise in GST cess from today
• Why GST Council's hike in cess for mid, large cars, SUVs comes as relief to automobile industry