The Centre will soon amend the GST (Compensation to the State) Act, 2017 to hike the compensation cess on SUVs, mid-sized, large and luxury cars after the Goods and Services Tax Council proposed to increase it to 25 per cent from the current rate of 15 per cent.
Prices of cars had decreased post the roll out of the GST from July 1, and the decision is expected to correct this anomaly.
“The GST Council has recommended that Central Government may move legislative amendments to increase the maximum ceiling of cess leviable on motor vehicles falling including SUVs, to 25 per cent instead of present 15 per cent,” said the Finance Ministry on Monday.
But, the decision on when to raise the actual cess leviable will be taken by the GST Council in due course, it said.
“The issue was discussed at the meeting of the Council on August 5, as it was found that after introduction of GST, the total tax incidence on motor vehicles has come down vis-a-vis the total tax incidence in pre-GST regime,” said the Ministry.
Sources said that the issue first came up for discussion in the GST Council’s meeting in July. Further discussion on the topic is expected in its next meeting on September 8.
The move comes at a time when hybrid car makers have been seeking a reduction in the compensation cess but the GST Council has not found it feasible.
The decision will impact cars under the label 8702 and 8703 of the GST laws. These include vehicles that transport 10 to 13 persons, hybrid cars and other cars including station wagons and racing cars.
Under GST, all cars are taxed at the highest slab of 28 per cent, large motor vehicles, SUVs, mid-segment, large, hybrid cars and hybrid motor vehicles also attract a compensation cess of 15 per cent. This works out to a tax incidence of about 43 per cent.
But earlier, the tax incidence on cars was between 52-55 per cent (excluding 2.5 per cent tax due to central sales tax and octroi).
Not surprisingly, with the near 12 per cent differential in prices with GST, domestic car sales are estimated to have risen sharply in July led by Maruti Suzuki India Ltd and Mahindra and Mahindra.
Auto makers also cut prices of many cars including SUVs by anywhere between ₹1 lakh and ₹3 lakh.