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GST – Small cars and 350cc+ motorcycles to get expensive

With Goods and Services Tax (GST) set to be introduced across India in the days ahead, consumers are in a quandary as to in what way this will impact the economy and various sectors. Where the automobile industry is concerned, the introduction of GST will have varying effects on vehicles.

The govt of India has now revealed as to how the tax will play for car and motorcycle buyers in the country. As per the GST structure, small cars under 4 meters in length and with 1200cc petrol engines will attract 1% cess while diesel vehicles with engine less than 1500cc will attract 3% cess. Cars in the mid sized segment, SUVs and luxury cars will all carry a 15% cess. Motorcycles on the other hand , with 350cc engines will attract 31% tax.

Under the current taxation system, smaller cars in the sub 4 meter category and with engine capacity upto 1200cc attract excise duty of 12.5%. 14% VAT and other levies takes total taxes upto 27% while GST will bring with it an added 1% taking total taxes to 28%.

While automakers of small cars will have something to worry about, luxury car makers hope to see positive results with the implementation of GST which puts a fixed slab of 28% even on large luxury vehicles and SUVs. Vehicles in this category currently see taxes to the extent of 41.5 to 44.5%. GST will see the base 28% tax and 15% cess taking total taxes on such models to 43% which is lower than current rate which could result in a lower pricing.

Please find below perspective from Sarika Goel, Tax Partner, EY India

· Indirect tax incidence on two wheelers as well as small cars (<4 meters) to largely remain the same as present, with GST rate at 28%. Additionally, a cess of 1% for small petrol cars (<1200 cc) and 3% for small diesel cars (<1500cc) as well as high end motorcycles (>350cc) would apply.

· Large cars and SUVs likely to benefit, with a lowering of indirect taxes on such vehicles. Presently, SUVs attract an overall incidence of above 50% which would come down to 43% (GST of 28% plus cess of 15%)

· GST on electric vehicles and tractors has been kept at the lower rate band of 12%. However, the manufacturers of such vehicles would face an inverted duty structure with major inputs liable to GST at either 18% or 28%. Though refund of excess input GST would be available, there could be significant working capital blockage for such sectors.

· Hybrid vehicles are proposed to be taxed at the highest GST rate bracket of 28% plus a cess of 15%. This could act as a dampener for OEMs proposing to invest in hybrid technology and adversely impact sale of such vehicles, unless a subsidy is separately given by the Government to offset such tax incidence.

· Prima facie, no major impact for commercial vehicles and parts thereof, both of which are proposed to be taxed at 28% GST. No cess on commercial vehicles except for vehicles for carriage of passengers between 10-13 persons, which will be charged a cess of 15%.

· Auto parts are proposed to be taxed at 28% GST. This could push up cost of after-sales service/ maintenance of vehicles, coupled with a possible increase in tax rate for services as well from 15% to 18%.

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