Image Source: CarDekho
In a move that could reshape India’s automobile pricing landscape, the GST Council is considering a major rate rationalisation that may slash the effective tax burden on large sedans and SUVs. The proposal, discussed at a recent ministerial panel meeting, suggests capping the Goods and Services Tax (GST) at 40 percent for luxury and sin goods, down from the current combined rate of up to 50 percent. If approved, this could lead to a sharp reduction in vehicle prices, especially in the premium segment.
Key highlights from the proposal:
1. The current tax structure for SUVs and large sedans includes 28 percent GST plus a compensation cess of up to 22 percent, resulting in an effective tax rate of 50 percent
2. The proposed reform would replace this with a flat 40 percent GST, eliminating the cess component
3. Some states have pushed for retaining a cess on top of the 40 percent slab, but the Centre is reportedly keen on a simplified structure
4. The final decision will be taken by the GST Council, chaired by Finance Minister Nirmala Sitharaman, in its upcoming meeting next month
5. The reform is part of a broader overhaul that also includes reducing GST on small cars and two-wheelers from 29 percent to 18 percent
Impact on vehicle pricing and consumer sentiment:
The proposed reduction in GST could significantly lower ex-showroom prices for internal combustion engine vehicles, including petrol, diesel, and hybrid models. While small cars and two-wheelers will see a percentage drop, the absolute savings for SUV and sedan buyers could be much higher.
- Entry-level cars may become cheaper by Rs 30,000 to Rs 36,000
- Two-wheelers could see a price cut of Rs 6,000 to Rs 7,000
- Premium SUVs and sedans may witness price drops of Rs 1 lakh or more, depending on model and engine specifications
This could boost demand in a sluggish market, especially ahead of the festive season. However, concerns remain about whether automakers will pass on the full benefit to consumers, as the anti-profiteering clause does not apply to this reform.
Industry dynamics and competitive implications:
The auto industry has long grappled with high taxation on larger vehicles, which has dampened demand despite rising aspirations among middle-class buyers. A flat 40 percent GST could:
- Level the playing field between ICE vehicles and electric vehicles, which currently attract just 5 percent GST
- Encourage manufacturers to reprice models and offer more competitive financing options
- Trigger a shift in consumer preference toward larger vehicles, narrowing the price gap with EVs
However, some experts warn that reducing the tax differential with EVs could slow down green mobility adoption, especially in price-sensitive segments like two-wheelers.
Policy background and rationale:
The compensation cess was originally introduced to offset revenue losses for states following GST implementation. It was meant to last five years but was extended by three more years due to the pandemic. With the economy stabilising, the Centre is now pushing to phase out the cess and simplify the tax structure.
The GST Council’s Group of Ministers has also proposed collapsing the 12 percent and 28 percent slabs into just two rates—5 percent and 18 percent—for most goods. Luxury and sin goods, including high-end vehicles, would fall under the new 40 percent slab.
Conclusion:
If implemented, the proposed GST reform could mark a turning point for India’s automobile sector. By reducing the tax burden on SUVs and sedans, the government aims to stimulate demand, simplify compliance, and make mobility more affordable. As the GST Council prepares to finalise the rates, consumers, automakers, and dealers alike are gearing up for what could be a game-changing shift in the auto market.
Sources: Times of India, News18, Amar Ujala.
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