India Goods Tax Puts Brakes on Toyota’s Production of Hybrids

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By Siri Bulusu

Toyota Kirloskar Motor, the Indian arm of Japan-based Toyota Motor Corp., said it has temporarily discontinued production of a hybrid vehicle model due to high prices driving down demand following implementation of the goods and services tax.

“The sudden increase in the price of hybrid [vehicles] has adversely impacted the demand for Camry hybrid in the Indian market—currently we have the stock to meet the customer demand, thus we have halted our Camry hybrid production for the time being,” a Toyota Kirloskar Motor spokesperson told Bloomberg Tax in an Oct. 23 emailed statement.

The sharp increase in the effective tax rate is due to a 15 percent compensation tax levied in addition to the goods and service tax rate, bringing the effective tax rate on hybrid cars up to 43 percent under the new tax regime.

“We would monitor the situation and start supplies as per the market demand, and we are not discontinuing Camry [Hybrid Vehicle] production in India,” Toyota Kirloskar Motor stated in the email.

Effective Tax Rate Spike

The effective tax rate on hybrid vehicles increased from approximately 25 percent to 43 percent upon July 1 implementation of the goods and services tax regime, which was aimed at consolidating a complex web of state and central taxes.

Under the previous tax regime, motor vehicles were subject to state taxes that would vary between 13 and 15 percent plus an excise duty of 12.5 percent—bringing the effective tax rate up to 27.5 percent. Practitioners say when the GST Council was assigning tax rates to different products, they intended to maintaining the previous effective tax rates. This led to cars being placed into the 28 percent tax bracket.

In a September news release, N. Raja, director and senior vice president of sales and marketing for Toyota Kirloskar Motor, said demand for the Camry Hybrid fell significantly owing to the price hike under GST. He said the government should reduce taxes to encourage green technology.

Next Five Years?

The 15 percent compensation cess is scheduled to be levied for five years, while state-level economies adjust to GST, but practitioners say the high tax rate on motor vehicles could last beyond the prescribed timeline.

“In theory, the compensation cess will only be levied for a limited amount of time, but the government may not be comfortable in lowering the tax rate on cars to such an extent after five years—it cannot be predicted at this time,” Jigar Doshi, indirect tax partner at SKP Business Consulting LLP, told Bloomberg Tax Oct. 23.

Doshi said that hybrid cars saw a rise in demand prior to GST because there was a clear tax advantage that made prices competitive against competing models. The effective tax rate following GST eliminated the tax advantage on hybrid cars and brought pricing on par with other car models.

Doshi said that by placing cars in the 28 percent tax bracket, “the government reasoning was to continue whatever tax incidence there was in the earlier tax regime, but motor vehicles actually saw a tax benefit under GST and so they increased the cess on motor vehicles so there was no accidental benefit.”

No Special Benefits for Motor Sector

The increased cess on motor vehicles did not directly apply to hybrid vehicles, but indicates that the government will not allow any special tax benefits to the motor vehicle sector, according to practitioners.

“The philosophy of the government is to heavily tax cars—it is placed in the same bracket as luxury items where the government feels expenditure needs to be curbed, even though there is a strong argument against cars being taxed as luxury items,” Saloni Roy, tax partner at Deloitte India, told Bloomberg Tax Oct. 24.

Roy said the compensation cess applicable to certain types of large and luxury vehicles can bring the effective tax rate up to 50 percent

“Hybrids are not getting any significant benefit even though the highest cess rates which reach up to 22 percent do not apply to them—since earlier they were availing certain concessions that made them competitive in the market,” Roy said.

Roy said electric and hybrid cars should be encouraged via tax policy in India, but the government is lagging in setting up the infrastructure required to drive demand among consumers.

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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