India’s Possible Car Tax Hike Irks Local Mercedes, Honda CEOs

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By Siri Bulusu

Mercedes-Benz and Honda’s India CEOs are “disappointed” with a recommendation from the country’s Goods and Services Tax Council that may increase the effective tax rate on luxury cars and larger vehicles to as much as 53 percent.

India’s July 1 transition to a goods and services tax regime was expected to bring down costs for consumers purchasing cars in India. Yet after finding that overall revenue from motor vehicles decreased under the GST tax regime, the GST council recommended increasing the compensation tax ceiling on large vehicles and luxury vehicles from 15 percent to 25 percent, an Aug. 7 Central Board of Excise and Customs press release said.

“We are highly disappointed with the decision,” Roland Folger, managing director and CEO of Mercedes-Benz India, told Bloomberg BNA in an Aug. 16 email. If it’s enacted, the tax rate increase will “reverse the positive momentum that the industry wanted to achieve with the introduction of GST.”

President and CEO of Honda Cars India Ltd. Yoichiro Ueno said in an Aug. 16 emailed statement to Bloomberg BNA that the GST Council’s recommendation to increase the compensation tax ceiling “was a big disappointment.” The move would “isolate India as a market with too much bias towards small cars,” he added.

Compensation Tax

The GST Council’s recommendation to increase the compensation tax ceiling by 10 percentage points on motor vehicles, which already attract up to a 28 percent GST rate, closely follows a sharp increase to compensation tax on tobacco products which sent major tobacco company shares tumbling after approval of the increase.

The compensation tax, payable in addition to GST, applies for five years after implementation of the new regime to compensate for any lost revenue to states incurred by reduced goods and services tax rates.

Based on the 28 percent rate, the council’s latest proposal would bring the maximum overall tax rate on large and luxury vehicles up to 53 percent, 2 percentage points higher than the pre-GST ceiling of 51 percent. A 53 percent rate would also be 10 percentage points higher than the post-GST tax ceiling including the compensation tax, which stands at 43 percent.

The proposed compensation tax, combined with the increased road tax rates, “will take the effective consumer price much above the pre-GST scenario level” and be a “strong deterrent to the growth of luxury cars” in India, Folger said.

GST Price Benefits

So far, car manufacturers have cited the benefits of India’s GST regime.

Honda Cars India Ltd. posted a 22 percent growth in sales for the month of July, according to an Aug. 1 company press release. The “post-GST price benefits, healthy monsoon and onset of festive season” would carry the increase in sales through August, it added.

The post-GST overall tax rate of 43 percent was very attractive to car manufacturers and consumers alike, as it fulfilled the GST regime’s promise of a reduced tax burden on consumers, Saloni Roy, tax partner at Deloitte Haskins & Sells LLP, told Bloomberg BNA Aug. 16.

“Prices have dropped and there are discounts being offered, so certainly the manufacturers would have been pleased with the outcome of GST and be opposed to this hike,” Roy said. “In case you’re looking to buy a car, now is a good time to buy.”

Increase Approval

The Central Board of Excise and Customs will hold internal discussions to approve or reject the proposed tax increase, but a date for that decision hasn’t been announced.

“The government’s perception is that if someone is looking to buy a car for 2.5 million rupees ($40,000), then a price increase by another lakh or two ($1,600 to $3,200) will not change that consumer’s decision to make the purchase,” Suresh Nandlal Rohira, partner at Grant Thornton India LLP, told Bloomberg BNA Aug. 16.

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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