Mid and large sized cars, luxury vehicles, hybrids as well as SUVs are likely to cost more as the Cabinet today cleared the issuing of Ordinance to raise the GST cess on them to a maximum of 25 per cent, from 15 per cent at present.
Car prices had dropped by up to Rs 3 lakh following the implementation of the Goods and Services Tax (GST) from July 1 and the ordinance is being seen as an attempt to rectify the anomaly where rates of certain common use items had gone up but luxury cars were costing less under the new regime.
Finance Minister Arun Jaitley said the ordinance, or an executive order, will amend the GST (Compensation to States) Act, 2017 to raise the maximum rate of cess.
However, he added, the actual cess on different classes of vehicles and as to when it will be implemented is to be decided by the GST Council.
Headed by Jaitley and comprising representatives of all states, the Council is to meet in Hyderabad on September 9.
The Ordinance, which is issued to enact a law or amend an existing legislation during times when Parliament is not in session, will now be sent to the President for promulgation.
The amendment would have to be approved by the Parliament within six months. The next session of Parliament is likely in November/December.
Jaitley said the objective of a taxation policy cannot be to make luxury items cheaper, and essentials costlier.
"If at all relief is to be given, it has to be given to a common man's item rather than a luxury item. So a person who can afford Rs 1 crore for a vehicle can also afford Rs 1.20 crore," he said.
Under GST, which replaced over a dozen central and state levies in the biggest tax reform since independence, cars attract the top tax rate of 28 per cent. On top of this, a cess of 1 to 15 per cent is levied for the creation of a corpus to compensate states for any loss of revenue from implementation of GST.
After the introduction of GST, the total tax incidence on motor vehicles (GST plus compensation cess) has come down when compared with the total tax incidence in the pre-GST regime.
The highest pre-GST tax incidence on motor vehicles worked out to about 52-54.72 per cent, to which 2.5 per cent was added on account of Central Sales Tax, octroi etc.
Against this, post-GST the total tax incidence came to 43 per cent.
Presently, large motor vehicles, SUVs, mid-segment cars, large cars, hybrid cars and hybrid motor vehicles attract a cess of 15 per cent on top of 28 per cent GST.
Small petrol cars of less than 4 meters and 1,200 cc attract a cess of 1 per cent, while small diesel cars of less than 4 meters and 1,500 cc engine attract a cess of 3 per cent.
An official said automobiles that currently attract 15 per cent cess would see the rate going up to 25 per cent.
The GST Council had in its August 5 meet recommended that the central government move legislative amendments required for increasing the maximum ceiling of cess leviable on motor vehicles to 25 per cent from present 15 per cent.
Jaitley said pursuant to GST implementation price of vehicles had "substantially come down", whereas the smaller vehicles remained untouched.
Raising the cess requires an amendment to the Schedule of section 8 of the GST (Compensation to a State) Act, 2017.
There are 12 different categories of automobiles and two categories are impacted by this decision to hike cess. "These hikes are not across the board," Jaitley said.
Revenue Secretary Hasmukh Adhia said the categorisation of cars has not changed. Cars on which there was a excise duty of 27 or 30 per cent, those were luxury cars.
"There is no intention of increasing rate on any other car other than those which were put in luxury category and had very high excise duty and VAT," Adhia said.
On whether the government will look at lowering rates on items of mass consumption going forward, Jaitley said the GST Council is "sensitive", but the expenditure requirement of states and optimum level of taxation has to be kept in mind.
"I think one has to study a pattern over several months before you have any knee jerk reaction," he said.
Justifying decision of GST Council on hiking cess post GST roll out, Jaitley said the object was GST could never be intended to make cigarettes cheaper.
"It would be a mindless policy if we did that," he said, adding only after implementation it could be made out where the "shoe-pinches".
The GST Council had hiked cess on cigarettes on July 18 to take away an estimated Rs 5,000 crore annual "windfall" manufacturers could have reaped from lower GST rates.
Sridhar V, Partner, Grant Thornton India LLP said: "While the ordinance sets right the anomalies which crept in while the rates were finalised for the passenger car segment in early June, the additional 10 per cent cess will have a dampening impact on the otherwise increased demand expectation for luxury cars and SUV, which in recent times have been picking up.
"The government is expected to come up with more clarity if it intends to have a couple of more levels of cess within the overall cess of 25 per cent.
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