Mixed Blessings

Taxes on cars could fall after GST comes into force next year. But companies fear consumers may put buying on hold till then.

- Sumant Banerji

While presenting Union Budget 2016/17, Finance Minister Arun Jaitley had a surprise for the automobile industry — an infrastructurecess of 1-4 per cent on cars. He also imposed 1 per cent tax on cars costing more than`10 lakh. Car makers were dismayed.

Not for long. This month, Parliament passed the Goods and Services Tax Amendment Bill, clearing the way for replacement of the host of taxes that Indian companies pay at present with GST. This will simplify the country’s tax structure and make life easier for tax payers. However, automobile makers are anticipating something more — a GST rate of 18-20 per cent, much lower than the 28-49 per cent cumulative taxes that they pay at present. This will reduce their tax burden and, if they pass on the savings to buyers, lower prices too. Every segment will gain, though sedans and sports utility vehicles, or SUVs, taxed at much higher rates than the others, may see sharper cuts (see Advantage Consumer).

Car makers are happy. But jittery too — they fear potential buyers will delay purchases in expectation of price cuts when the GST comes into force next year. This could impact sales in the short term.

Tax Maze

The biggest tax for car makers is excise duty of 12.5-30 per cent; the collections go to the central exchequer. Plus, there is 12-14.5 per cent value added tax, or VAT, whose proceeds go to the state government. With cesses, the total tax on a small car is around 28 per cent. For a mid-sized sedan such as Honda City, it is 44 per cent. For an executive sedan such as Toyota Corolla, it is 46 per cent, while for a burly SUV such as Mitsubishi Pajero, it is 48 per cent.