Why GST Council's hike in cess for mid, large cars, SUVs comes as relief to automobile industry

Key highlights:

• Hike in GST cess on mid-size cars will be 2%
• GST cess on large cars increased by 5% to now 20%
• SUVs to incur hike of 7% in cess to now 22%

The GST Council on Saturday took the decision to increase the goods and service tax (GST) cess on mid-size, large cars and SUVs. They decided on an additional levy of 2 to 7% on them, but exempted small and hybrid cars from any hike.

The GST Council's decision to increase the GST cess brings the taxes to the pre-GST levels, said Finance Minister Arun Jaitley after an 8-hour long meeting with the council in Hyderabad.

However, the GST Council's revision in the GST cess on mid-size, large cars and SUVs was made to still keep it a little lower than the pre-GST levels.

This comes as good news to car companies that have been pushing for the government to not club mid-size, large cars and SUVs with the same GST cess as luxury cars as that would have an adverse impact on the automobile industry.

Recently, the GST Council had taken to increase the cess on luxury cars from 15% to 25%. As the earlier GST rate had clubbed all cars above 4 meters in length to one category of taxes, this meant that even mid-size, large cars and SUVs would incur the same hike in GST cess. This industry leaders said would take the taxes on these cars to pre-GST levels and would mean a hike the prices of their cars.

While passenger vehicles larger than 4 meters account for 28-30% of the total sales in India, it contributes to 50-60% of the industry turnover and therefore makes a much larger contribution to the government.

With a huge hike in prices would lead to lower sales, thus impacting the whole automobile industry.

"Small petrol and diesel cars enjoyed a tax advantage of 3% post GST. But status quo will be maintained on small petrol diesel cars, so even if it has got cheaper let consumers enjoy the benefit," Jaitley said.

Tax on mid segment cars had gone down from 48% to 43% and the council today decided to increase cess by 2% to 45%, he said.

This means that the mid segment cars which earlier incurred a GST tax of 28% in addition to a cess of 15% to bring the total tax to 43%, will now incur a cess of 17% to bring the tax to 45%.

However, this is still 3% cheaper to the pre-GST taxation level which was at 48%.

Cars in the mid-size segment include popular sedans such as Honda City, Maruti Suzuki Ciaz and Toyota Corolla.

Large cars got an advantage of 8%, but the council hiked the cess today by 5%, Jaitley said, adding SUVs got benefit of 11% post GST, but cess is being hiked by only 7%.

This means that while the GST cess for large cars was 15% earlier, it will now be hiked to 20%. It brings the total tax on large cars to 48% from 43% earlier.

Just after the roll-out of GST, large cars got the benefit of an 8% difference in tax from the pre-GST taxes. While the pre-GST taxes on large cars came to around 51%, the new adjustment in the taxes will still be 4% lower that the pre-GST level at 48%.

SUVs, on the other hand, will now incur a GST cess of an additional 7%. This means that the GST cess on SUVs will increase from 15% to 22%. In addition to the GST tax of 28%, this brings the total tax on SUVs to 50%.

This total GST tax rate on SUVs is still 4% lower as the pre-GST level taxes on this segment was at around 54%.

"Cess on cars with seating capacity above 10 but up to 13 as well as hybrid cars will remain unchanged," Jaitley said.

While Jaitley said that the date of the implementation of the additional cess will be notified later, it can be expected to implemented as soon as it gets the Union Cabinet's nod.

At the end of August itself the Cabinet gave its approval to the Finance Ministry to implement the GST Council's decision to increase the GST cess on luxury cars. This came just few after GST Council at the start of August recommended increasing the cess on luxury cars.

(With inputs from PTI)

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