German luxury carmaker Mercedes-Benz on Sunday slammed the GST Council's decision to hike cess on luxury cars, calling its unfortunate which "overlooks their contribution to industry and the economy".
The cess on mid-sized cars such as Hyunda Verna, Honda City, Volkswagen Vento, Maruti Ciaz, Toyota Corolla has been hiked by 2 per cent, taking the effective GST rate to 45 per cent. According to the Finance Minister, the pre-GST rate has not been restored, even though they had a headspace of hiking the cess by 10 per cent, it has only been hiked by up to 7 per cent.
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While the increase in cess will impact consumer demand, investment and job creation, we are glad that the Government and GST Council took note of our concerns and somewhat moderated the increase in cess. This means either the rates are converged at a single rate of 18% or at lowered down to two rate slabs of 12% and 18%. With the new GST Cess, the taxation on mid-sized passenger cars has been nearly restored to the pre-GST levels, while taxes on luxury cars and SUVs have been slightly moderated as compared to the pre-GST rates.
So far, the GST Council had been following the concept of applying immediate charges on anything that has high-yielding revenues or luxury item or is a sin good. With the revised GST rate totaling to 50%, it is only 1.5% lower than the pre-GST level tax rate.
"Post the initial interruptions and marginal price adjustments, we expect the impact to be limited given the inelastic nature of demand for luxury cars", said the report. As the tax rates fixed under the GST, which came into effect from July 1, were lower than the combined central and state taxes in pre-GST days, the auto prices had dropped by up to Rs 3 lakh. Initially, the cess was proposed to be raised by a maximum of 10%.
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The taxes on this industry were already very high and we expected the unfulfilled potential of this segment to increase after the implementation of GST and rationalization of taxes.
It says the main drivers of growth for auto sales are the GDP growth of around 7%, repo rate decreased in the third bi-monthly monetary policy for this financial year, good monsoon season and higher farm income, and higher income levels and consequently higher disposable income.
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