GST regime: SUVs, mid/large sedans likely to get cheaper

Small cars, which dominate India’s landscape, could get slightly more expensive in the new Goods and Services Tax regime scheduled to kick in from July. On the other hand, SUVs and mid/large sedans will become a tad more affordable.

The GST for all cars will be 28 per cent, with an additional 1 per cent cess on compact petrol offerings with engine capacities of up to 1.2 litres. In the case of small diesel cars with engine capacities not exceeding 1.5 litres, the cess will be 3 per cent.

Effectively, this means that petrol small cars will have a combined levy of 29 per cent compared to the present 27 per cent structure that includes excise duty and other taxes. Compact diesels will be even higher at 31 per cent in the GST regime, a good 4 percentage points higher than the existing level.

The cess for SUVs and mid/large sedans will be 15 per cent from July 1, which means an overall levy of 43 per cent, lower than the near 46 per cent duty/tax structure existing today. With the growth momentum for SUVs already happening, this will only pick up pace in the GST regime.

This will be welcome news to companies like Mahindra & Mahindra, Hyundai, Maruti, Honda and Volkswagen, which are stepping up their game in SUVs. “A lot depends on the definition of luxury vehicles, but looking at the rates announced, bigger vehicles appear to become cheaper. But, it is unlikely that the government will have lower taxes on bigger vehicles,” said Abdul Majeed, Partner at PwC.

It remains to be seen how customers react to a slightly pricier regime in small cars. Given that levels of affluence have been on the rise, a difference of 2 percentage points for petrol compacts may not really deter buyers.

This may, however, be different in the case of diesel small cars which will be more expensive in comparison. In any case, customers are increasingly gravitating towards petrol small car options since the time diesel prices were deregulated.

There could be mixed reactions within industry on the decision to levy 43 (28 + 15) per cent on hybrids too at a time when the country is seeking options to clean up vehicular emissions. The Centre, though, is keen on promoting electric cars, which are out of the 28 per cent GST umbrella on automobiles and at a lower 12 per cent slot instead.

“The government keeps on changing the policies and this decision would make hybrid cars more expensive. I don’t know why there is a mention of ‘hydrogen vehicles based on fuel cell’, which are not even a reality right now,” said RC Bhargava, Chairman, Maruti Suzuki.

In addition, market dynamics could change after April 2020, when Bharat Stage VI emission norms become mandatory. With substantial technology investments, diesel small cars could become even more expensive and perhaps marginalised in the bargain. Diesel will still be the fuel of choice for SUVs while large cars will increasingly be sought after by the end of this decade.