GST Council may cut tax on hybrid vehicles as auto sector battles slowdown

The government is examining a rate reduction for such vehicles by doing away with the cess, which will bring down the tax incidence from 43% to 28%

Amid the auto industry’s clamour for a cut in the goods and services tax (GST) rate, the GST Council may give a breather to the hybrid vehicles segment in its upcoming meeting.

The government is examining a rate cut for such vehicles by doing away with the cess, which will bring down the tax incidence from 43 per cent to 28 per cent. Hybrid vehicles use both a small internal combustion engine (ICE) and an electric motor for minimising emission.

The auto sector is facing the worst slump in 20 years, with sales of passenger vehicles plummeting by 30.98 per cent in July over the same month last year. 

The fitment committee is expected to discuss the feasibility of the rate cut in its meeting on Friday before the matter is placed before the Council. 

“Cutting rates for hybrid vehicles appears easier than other categories of the automobiles sector because it may have a limited impact, in terms of revenue. The matter will be discussed by the fitment panel before the proposal is finalised,” said a government official.

The Ministry of Road Transport and Highways wrote to the finance ministry, seeking a goods and service tax rate cut for vehicles running on hybrid power and compressed natural gas.  All four- and two-wheelers for commercial or personal use — except electric vehicles, bicycles, rickshaws, etc — are now in the 28 per cent GST bracket. 

Last month, the GST Council had cut rates on electric vehicles from 12 per cent to 5 per cent. In the pre-GST regime (prior to July 2017), the tax incidence on hybrid vehicles was around 30.3 per cent, similar to entry-level cars. 

This included an excise duty of 12.5 per cent, a 12.5 per cent value-added tax, 1 per cent national calamity contingent duty, and 2 per cent central sales tax. It was exempt from the infrastructure cess. However, under the GST, it was put in the same category as big petrol and diesel luxury cars attracting a 28 per cent rate with a cess of 15 per cent.

India has a limited number of hybrid car models such as Toyota’s Camry and Prius, Mahindra Scorpio Intelli, and Honda Accord. “Reductions in GST rates for the sector could bring down prices and thereby improve sentiment. However, the demand push due to such a cut would need to be evaluated. The impact of any rate cut on GST collection, which has been subdued, would need to be considered,” said M S Mani, partner, Deloitte India. 

According to an internal study by Toyota, sales of the Camry fell after the hike in tax incidence following the implementation of the GST, causing a revenue loss to the exchequer (see chart).  

“Historically, we have seen that GST rate cuts do not necessarily lead to reduction in collection because they spur demand. Given the challenges the auto sector is facing, there is a case for stimulus in the form of tax cuts despite the slowdown in collection,” said Pratik Jain, partner, PwC India.  

Maruti Suzuki Chairman R C Bhargava had also demanded a tax cut for hybrid and CNG vehicles. 

However, according to government officials, none of Maruti Suzuki’s so-called hybrid cars meets the criteria of a hybrid vehicle. 

“According to the government’s notification, Maruti Suzuki’s cars are not hybrid in the true sense, but only have a limited feature, where the battery is used only when the car is stationary. Hybrid car concessions may not apply to them,” said a government official.

The grim GST position will also be discussed by the Council.