Higher cess will hit demand for SUVs, large cars

It has been a short-lived honeymoon for SUVs and large cars in the Goods and Services Tax (GST) regime as they are set to become dearer.

The GST council has given the go-ahead for an increase in cess to 25 per cent from 10 percent for all models over four metres and with engine capacities exceeding 1.2 litres (for petrol) and 1.5 litres in the case of diesel.

This will mean that models like the Innova Crysta, Fortuner, Hyundai Creta, Mahindra XUV 500 as well as the recently launched Jeep Compass could see a significant hike in prices. This will also include top-end offerings from BMW, Mercedes, Jaguar Land Rover and others.

However, small cars and SUVs like Vitara Brezza and the to-be-launched Tata Nexon, which are under four metres in length and with the prescribed engine capacities, will see no change in the overall levy structure. The silver lining in the cloud is that the price hikes are not going to be implemented immediately since the appropriate notification will have to follow.

Yet, there is no taking away the fact that automakers will be an unhappy lot especially when they were on cloud nine less than six weeks ago when GST became a reality. Large cars and SUVs became more affordable at a combined levy of 43 per cent (28 per cent GST and 15 per cent cess) compared to levels of 50 per cent prior to this new regime.

In the case of small cars, the levy was 29 per cent for petrol (28+1) and 31 per cent for diesel (28+3) options which seemed reasonable in the overall structure. The only category that seemed shortchanged was hybrids where the levy was 43 per cent while electric cars got the biggest tax break at just 12 per cent.

Yet, there were some disturbing trends in the weeks that followed when Maharashtra imposed a two per cent road tax on vehicles which only hiked their price tags. Since road tax was out of the GST ambit, it was now a concern among automakers that other states would follow suit with reports doing the rounds that Tamil Nadu was next in line.

With the GST council now revising the cess for SUVs and large cars, it remains to be seen if Maharashtra will roll back its road tax levy. After all, the issue eventually boils down to states ensuring that they get enough revenue and there would really be no compelling reason to continue with a road tax levy once a higher cess is in place.

The auto sector will, of course, be sorely disappointed with the way the entire script has panned out especially manufacturers of large cars and SUVs. In addition, they will need to work overtime on planning despatches from factories to dealerships. Customers will be keen on buying models before prices are hiked and there will be a scramble at showrooms over the next few weeks.

This back-and-forth on levies will also do little in boosting confidence among manufacturers who would have been hoping for greater policy consistency in a GST era. There is no telling what could happen next especially if states begin independently imposing levies which are out of the GST ambit as in the recent instance of road tax.

The only consolation, according to an auto industry executive, is that hybrids will now be at a lower levy of 43 per cent compared to SUVs and large cars which will attract a heftier 53 per cent. It remains to be seen how the market will react to this change though it is a fair bet to assume that small cars will be back in favour even while the sub-four metre rule continues to raise the hackles of other multinational automakers.

COMMENT NOW