Hike in GST cess on luxury cars will dent Make in India, say carmakers
New Delhi: Makers of sports utility vehicles (SUVs) and luxury cars are protesting the GST Council’s plan to raise the cess on such products from 15% to as much as 25%, warning that the move will lead to production cuts and job losses and dent the “Make in India” initiative.
If the cess is indeed increased, prices of some of the top luxury cars are expected to go up by between Rs72,000 and Rs2.58 lakh.
“This move will impact production and jobs. I am surprised. I have no face to show to our principals in Japan,” Shekar Viswanathan, vice-chairman of Toyota Kirloskar Motor Pvt. Ltd, said in a phone interview. “This move will end up favouring one set of players vs another set of players.”
An official statement from the finance ministry said that after GST was introduced on 1 July, the total tax incidence on motor vehicles, comprising the tax rate and cess, came down compared with the total tax incidence under the pre-GST regime.
Accordingly, prices of most SUVs were cut between Rs1.1 lakh and Rs3.5 lakh. 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 grew 21% and 43% respectively.
Considering that a sharp cut in prices of luxury cars might send the signal that the tax reform is making luxury items cheaper, eroding the government’s revenue, the GST Council wants to readjust the cess on cars.
The finance ministry statement said the GST Council considered this issue at its 20th meeting on 5 August and recommended to the central government to move legislative amendments required for increasing the “maximum ceiling of cess leviable on motor vehicles to 25% instead of present 15%”.
“The government has not been consulting industry at all on this particular issue. They just need to understand that this (is) not how businesses are done,” Toyota’s Viswanathan said.
Toyota will look to deploy its “engineering resources” in other countries, he added.
“Not that their (Toyota Japan) interest in India will go away permanently. But the fact remains that there are so many other opportunities where limited engineering resources will be accepted,” he added.
India’s largest luxury car maker Mercedes-Benz India Pvt. Ltd said the move will affect its plans for expansion under India’s “Make in India” programme, which seeks to promote local manufacturing in order to create more jobs.
“We feel deprived as the leading manufacturer of luxury cars in India,” said Roland Folger, managing director and chief executive, Mercedes-Benz India.
He expects sales of luxury cars to decelerate and emphasized the need for a long-term road map for the luxury car industry, which has been “at the receiving end of arbitrary policies”.
“The constant shift in policy makes our long-term planning for the market highly risky, and we think this would only have an adverse impact on the country’s financial ratings,” Folger added.
To be sure, India’s auto industry has faced headwinds in the past on the policy front: it had to agree to an additional 1% green cess on diesel vehicles; clearance of Bharat Stage III vehicle inventory; increased GST rate on hybrid vehicles; and leapfrogging to BS VI emission norms from BS-IV in a period of four years, skipping an intervening stage.
Not everybody in the auto industry is on the same page on the latest issue.
According to a top industry executive who spoke on condition of anonymity, originally the government wanted to increase taxes on luxury cars and SUVS.
“That made sense to me. What did not make sense was that original GST led to reduction in prices for luxury cars. Maybe they are correcting that. If that is the case, it is fine. Nobody will object to it. There is no reason why such a big reduction should be given to bigger cars and not to smaller, fuel efficient cars,” the executive said.