Additional cess on mid-sized vehicles now at 17 percent (up 2 percent), on large vehicles at 20 percent (up 5 percent) and on SUVs at 22 percent (up 7 percent).Car buyers in the market for an SUV, a luxury car or a mid-size vehicle will have to brace for a possible hike in price as the Goods And Services Tax (GST) council today increased the cess on certain category of passenger vehicles in its latest meeting.

Under the new GST code, the additional cess on mid-size vehicles has been raised by 2 percent to 17 percent, on large vehicles by 5 percent to 20 percent and on SUVs by 7 percent to 22 percent. Under the original GST rate, the above category of vehicles were to be taxed at a flat rate of 28 percent, with an additional cess of 15 percent.

As a result of the hike in cess, the total tax incidence on mid size cars, large vehicles and SUVs now stands at 45 percent, 48 percent and 50 percent respectively.

However, the GST council, headed by finance minister Arun Jaitley, has refrained from hiking the cess on small cars[length of under four metres, and engine capacity less than 1,200cc (petrol) and 1,500cc (diesel)], vehicles with 13 seats and hybrid vehicles.

The move comes little over a week after the Union Cabinet officially approved the hike in the Goods and Services Tax (GST) cess ceiling on luxury cars and SUVs to 25 percent from the earlier 15 percent. However, the Cabinet’s decision evoked sharp reactions from the automakers, who said the hike will force them to rework their strategy, thereby impacting long-term planning.

The final decision to levy differential cess on vehicle categories suggests that the government seems to have taken note of the industry’s concerns to some extent by capping the highest applicable tax  rate at 7 percent.

Nevertheless, luxury carmakers such as Mercedes Benz and Audi are set to be hit the hardest by the cess hike while a few such as Maruti will be relatively less affected.

“The decision to increase the cess yet again is very unfortunate and totally overlooks  the contribution we make to the industry and to the economy. Though luxury car industry’s volume contribution is very low, our value wise contribution is much higher and that has immense potential to grow even more in the future, had there been fair taxation. With this increase in Cess now, the prices are bound to leap back to the pre-GST regime, in some cases higher than the pre-GST regime, thus negating altogether the benefits of GST regime,” Roland Folger, MD & CEO, Mercedes−Benz India said.

“The taxes on this industry were already very high and we expected the unfulfilled potential of this segment to increase after the implementation of GST and rationalization of taxes. Even if the rumoured  cess hike of 10% was not concluded, the prices will go up again, which is disappointing. We will need to study the impact of this hike on the buyer sentiment.” Rahil Ansari, head, Audi India said in a company statement.

As a result of the increase in cess, manufacturers will be forced to reverse price cuts that were implemented when GST was introduced.

“While the increase in cess will impact consumer demand, investment and job creation, we are glad that the Government and GST Council took note of our concerns and somewhat moderated the increase in cess,”  Rohit Suri, President and Managing Director, Jaguar Land Rover India said.

The proposal to raise the cess came after the GST council realised that the total tax incidence on motor vehicles was lower post GST, as against the tax incidence before the implementation.


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