MUMBAI: India's luxury-car market, which was bracing for double-digit growth, may hit a roadblock if the government implements the decision to raise the cess on large vehicles. In such a scenario, sales could even fall in 2017, industry executives said.
After a dismal performance in 2016, when the market shrank, luxury-car manufacturers had become upbeat when India set levies on the segment under goods and services tax at a lower rate compared with the previous regime.
They had immediately cut prices to pass on the benefit to consumers, who had responded positively, pushing up demand. But earlier this month, the
GST Council decided to raise the cess charged on large cars and utility vehicles to 25% from 15%, taking the total tax incidence to 53% (28% GST plus 25% cess).
The new rate is similar to the pre-GST levels for luxury vehicles and yet to take effect, but has still upset automakers who say they will have to increase prices if the government implements the decision.
That may lead to a double-digit drop in sales, affect future investments and cause job losses, industry executives said.
Rahil Ansari, director for the Audi brand in India, said the company had budgeted for double-digit growth, but now it may be the opposite.
"I am not sure what the main factors behind the change in rates are ... If the cess were to go up by 10%, then we expect a double digit decline in sales, probably around 20%," said Ansari.
The luxury car market posted a 2% decline in 2016 with sales of about 35,500 units. Many had felt the market to be closer to 40,000 units this year, with a series of new car launches and an improving sentiment.
After the initial GST rates were announced, Mercedes-Benz, Audi and BMW had forecast double-digit growth.
Mercedes-Benz's sales in June and July had added to India managing director Roland Folger's conviction that GST would infuse growth to the luxury segment.
But now, the higher cess "has thrown a spanner to our planning and pricing strategy and it affects our long-term planning", he said. "Luxury auto brands are now left scrambling for short-term measures, instead of planning confidently for future market growth."
Jaguar Land Rover's sales in India had expanded in high double digits in April to June, but a higher cess could pull it down, said India head Rohit Suri.
"We were looking at expanding our dealership, we were looking at local manufacturing of more products, because market was looking healthy and double-digit growth will spur us to get more products and have a positive business case.
But now we are going back to the drawing board and questioning the business case. Now we cannot expand dealership, cannot hire more people," Suri told ET.
ET View: Extra cess is rational
The proposed levy would raise the tax rate to pre-GST levels, true. But a fundamental cannon of taxation is the ability to pay principle, and it cannot be gainsaid that buyers of luxury cars would have the wherewithal for the additional cess. Besides, the effective tax rate should be lower with GST, as tax setoffs would be available along the value chain. Further, there would be much scope to rationalise the GST rates in a couple of years or so. And we need to extend GST to automotive fuels, so as to boost tax efficiency and avoid tax-ontax read cascading rates.
Source: economictimes.indiatimes.com