Impact Of Proposed GST Rates On Cars

  • Jun 07, 2017

Ever since taking charge, the Narendra Modi-led BJP government has steadily worked towards implementing a simplified tax structure. In an attempt to abolish the dozens of taxes levied by states and the Centre, the council has decided to eliminate them and opt for four simple groups. The slabs are set at 5, 12, 18 and 28 per cent, and the council decides what products fall under these categories.

Parliament House

The 28 per cent bracket is the highest in the Goods and Services Tax (GST) structure and all that’s seen as a luxury fall under this slot. Unfortunately, cars are still considered as a luxury product, and they enter the highest slab. That's not all. An additional cess of 1, 3 or 15 per cent is also proposed to be slapped on top of the GST based on how the car is classified.


Small petrol and diesel cars will pay a 1 and 3 per cent of additional cess, respectively. Cars with an engine bigger than 1.5-litre and length over four metres will pay 15 per cent of cess on top of the GST.

Current excise duty slabs for cars are as follows:

- 12.5 per cent: Length < 4m and engine displacement < 1.2-litre (petrol) and < 1.5-litre (diesel)

- 24 per cent: Length > 4m and engine displacement < 1.5-litre (petrol and diesel)

- 27 per cent: Length > 4m and engine displacement > 1.5-litre

- 30 per cent: Length > 4m and engine displacement > 1.5-litre and ground clearance > 170mm

The total tax on a car excluding registration and RTO fees currently ranges from 26 to 50.5 per cent based on its dimension and displacement. Owing to the multi-level cascading nature of our current tax system, the percentage of the overall tax paid stands at a much higher figure than what a simple sum would suggest.

According to the new rules, the taxes on new cars could range from 29 to 43 per cent with a maximum of two levels for all cars with an internal combustion engine. That's an increase of 3 per cent on the lowest and a drop of 7.5 per cent at the highest end of the spectrum. States with higher VAT will witness a hike of no more than 1 per cent. Therefore, the proposed GST rates will shrink the gap between the prices of small and big cars. This could result in a price rejig, especially in the Rs 7-12 lakh price bracket where 'small' and 'big' cars co-exist.

[caption id="attachment_106024" align="aligncenter" width="650"]Honda WR-V Honda WR-V[/caption]

To give an example, in Delhi, a Honda WR-V buyer, who could also be eyeing the Hyundai Creta, will now be able to stretch the budget to accommodate the latter thanks to the narrower price gap between the two. As the Creta loses 1.5 per cent of its value while the WR-V adds 3 per cent to the ex-showroom price, the overall gap could get come down by about Rs 50,000.

Hyundai Creta

On a big car like the Toyota Fortuner, a buyer currently pays:

- 30 per cent excise duty

- 4 per cent infrastructure cess

- 12.5-14.5 per cent VAT (varies from state to state)

- 1 per cent green cess (applicable in some states)

- 1 per cent luxury cess (for cars that cost more than Rs 10,000)

On a small like a Maruti Suzuki Swift petrol, the current tax structure is as follows:

- 12.5 per cent excise duty

- 1 per cent infrastructure cess

- 12.5-14.5 per cent VAT (varies from state to state)

The registration and road tax is expected to remain unaffected by the new GST norms. These charges vary from state to state and currently range between 3 and 23 per cent.

Differently-Abled To Benefit

There's good news for the differently-abled, though. Cars registered under the 'invalid carriage' category will fall under the GST's 18 per cent slab. As the state-run public transport in our country isn't very friendly towards the disabled, making a car more affordable instead can be considered a positive move. Those who can drive will certainly benefit from this move.

Electric Vehicles Get A Blind Eye

Electric passenger cars, two-wheelers and three-wheelers get further relaxation as they enjoy the 12 per cent tax slab. That makes them at least 17 per cent cheaper given that they also don't have to pay the additional cess. So far, on the central government's end, a car like the Mahindra e2o Plus has had an advantage of 6.5 per cent over a comparable car like the Swift. Then, it's up to the states to decide how much VAT an electric vehicle should pay. Delhi, for example, charges 5 per cent VAT on EVs; a relaxation of 7.5 per cent. Rajasthan, on the other hand, completely waives off the VAT on electric vehicles.

While the prices of EVs will drop in states that haven't been warm and welcoming towards cars of the third kind, states that want to promote widespread adoption will witness a price hike. The response EVs got with the GST is lukewarm at best.

The government had recently set a goal for itself to have only electric vehicles on sale by 2030. Chances of that becoming a reality are bleak if EVs are left in the 12 per cent slab. These clean alternatives should be either made tax free or at least charged as little as possible until the EV market become self-sustainable.

Party Over For Hybrids?

While the proposal clearly specifies a lower tax slab for electric cars, there's no such provision for a hybrid vehicle. Till date, hybrid cars like the Maruti Suzuki Ciaz, Toyota Prius and Volvo XC90 T8 were enjoying a lower excise duty of 12.5 per cent, same as Tata Nano's. Delhi government further gives them a breathing room of 7.5 per cent by dropping the VAT to just 5 per cent.

While the proposal shows a noticeable push for electric vehicles, it pays no regard to hybrid vehicles. At first glance, it looks like the government wants buyers and manufacturers to pick a side and either go all electric or stick with internal combustion engines. But later, the council announced that GST for hybrids would be reconsidered and that it could get a lower tax bracket. Going one step lower on the GST table will result in a tax break of 10 per cent. That's a good chunk of change for cars that are perfect to bridge the gap between internal combustion engines and electric motors.

Mercedes-Benz 2017 E-Class

With the rollout of the GST, small petrol cars will witness a nominal hike, but it won't be enough to put off any potential buying decisions. The mid-size cars will continue with more or less the same tax amount while bigger cars will witness a considerable drop. The sales of high-end luxury cars will remain unaffected because of the availability of disposable funds, but more affordable cars that have ended up in the big car slab (e.g. Creta/S-Cross) will certainly sway some buyers in their favour. Cars like the Honda City will get costlier in certain states and cheaper in others.

Small cars with diesel engines will take the biggest hit of 2 per cent over and above what the small petrol cars pay. The tides are already changing, and the GST will further widen the gap between petrol and diesel cars pushing our diesel-centric car market in favour of petrol cars.

Ford Mustang

Other than that, the entire industry is expected to carry on with business as usual post GST rollout.


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