Mid-size, large cars and SUVs are soon going to be expensive as Cabinet on Wednesday cleared the issuing of Ordinance to raise the GST cess on them to a maximum of 25 per cent from 15 per cent at present and quite natural car companies and its association SIAM and termed the move detrimental for growth momentum of the segment.

“Although the clearance of the ordinance is just an enabling clause for the GST Council to be able to increase the cess but it is clearly evident that the Government’s  intention is to increase the overall tax burden on many different categories of vehicles. This will increase the post GST price of many vehicle categories from Pre-GST level and have a negative impact on sale of such vehicle models in the market,” said statement from SIAM.

Actually car prices had dropped by up to Rs 3 lakh after Goods and Services Tax (GST) got implemented from July 1 and this move is being seen as an attempt to rectify the anomaly where rates of certain common use items had gone up but luxury cars were costing less under the new regime.

Finance Minister Arun Jaitley said the ordinance, or an executive order, will amend the GST (Compensation to States) Act, 2017 to raise the maximum rate of cess, adding, the actual cess on different classes of vehicles and as to when it will be implemented is to be decided by the GST Council.

Expressing his concern on the Government move, Audi India Head Rahil Ansari said: “The taxes on this industry are already very high and this increase in cess rate will be detrimental to the luxury car industry as we will be forced to hike our prices to levels higher than pre-GST period”.

He also requested  GST Council to “carefully evaluate the negative impact on this and, if a decision is taken on a 10 per cent cess increase, postpone the implementation for another 6-12 months to evaluate the real impact of the GST on the automobile sector, in particular the luxury segment”.

Expressing similar sentiment Mercedes- Benz India MD & CEO Roland Folger Folger said:  Auto industry attracts one of the highest rate under the GST and even without the proposed increase the luxury segment is already highly taxed, which constrains its growth.

“Now, with this proposed measure, the luxury car industry is going to decelerate. If at all it was required, a review could have been taken after six months when the outcome of GST regime would have been clearer,” he added.

Finanace Minister clarified that the objective of a taxation policy cannot be to make luxury items cheaper, and essentials costlier. “If at all relief is to be given, it has to be given to a common man’s item rather than a luxury item. So a person who can afford Rs 1 crore for a vehicle can also afford Rs 1.20 crore,” he said.

Mahindra & Mahindra Managing Director Pawan Goenka, however, said the passing of ordinance to increase limit of cess to 25 per cent on certain class of vehicles, was along the 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.

Under GST, which replaced over a dozen central and state levies in the biggest tax reform since independence, cars attract the top tax rate of 28 per cent. On top of this, a cess of 1 to 15 per cent is levied for the creation of a corpus to compensate states for any loss of revenue from implementation of GST.

After the introduction of GST, the total tax incidence on motor vehicles (GST plus compensation cess) has come down when compared with the total tax incidence in the pre-GST regime. The highest pre-GST tax incidence on motor vehicles worked out to about 52-54.72 per cent, to which 2.5 per cent was added on account of Central Sales Tax, octroi etc.

Against this, post-GST the total tax incidence came to 43 per cent. Presently, large motor vehicles, SUVs, mid-segment cars, large cars, hybrid cars and hybrid motor vehicles attract a cess of 15 per cent on top of 28 per cent GST.

Small petrol cars of less than 4 meters and 1,200 cc attract a cess of 1 per cent, while small diesel cars of less than 4 meters and 1,500 cc engine attract a cess of 3 per cent. An official said automobiles that currently attract 15 per cent cess would see the rate going up to 25 per cent.