Why taxation in automobile sector remains a big concern?

Have you ever questioned yourself, why do you buy a car? Well, it's a simple question, and we all can answer that. For commuting, maybe for security purposes, because you might not feel safe traveling through public transport. But, the biggest reason that may be valid for many people is "Sharma Ji has gifted a Fortuner to his son" or "Binod got a BMW for himself."

It's the harsh truth of the Indian society that we consider cars more as a status symbol rather than looking at it as a utility. Whatever your reason may be, but sometimes just to match up with others we book significant losses for ourselves. How? Let us discuss this.

Have you ever thought why the automobile sector is the backbone of the Indian economy? Why not the IT sector? This is because of the taxation policy of automobile sector. We all pay taxes in almost everything we buy in our day to day lives, and there is nothing new to it because taxes are a revenue source for our government.

But, have you ever thought about how much tax do you pay to buy a car? If not, then reading this blog further might shock you.

Current Scenario

Currently, the government is focusing on the "Make In India" campaign; the government has seen the COVID - 19 pandemic as an opportunity for India. Therefore, it is inviting different businesses to grow and expand in India.

But surprisingly, on September 15, Vice-chairman of the Toyota unit in India, Shekar Viswanathan, told Bloomberg that Toyota would not invest in India in the future anymore because of the high taxes that the Indian government imposes on cars and motorbikes. Toyota is one of the biggest car manufacturing companies globally, and their decision to not investing India might have impacted India's growth adversely.

But, later just hours after this report Vikram Kirloskar, Vice-Chairman of Toyota Kirloskar Motors, released a public statement that India has been the part of their global strategy, and they will continue their operation in India. He also stated that they need support from the Indian government to sustain in the industry.

But why did Toyota say no at first instinct is because the company is not able to meet the scaling requirements. Jaguar also raised this concern in the past. Rohit Suri, President and managing director at Jaguar Land Rover, said JLR India is "eager to bring many more cars and make them in India", but the high taxation is a significant hurdle.” But, the question here is, why is this happening? What exactly is the tax policy for cars and motorbikes in India? 

Taxation of Motor Vehicle in India

1. GST, the first tax that applies to any motor vehicle, is GST, which is 28%, 14% goes to the state government, and 14% to the central government. 

2. CESS is the tax levied on certain goods and services apart from GST. This tax varies from 1% to 22%, depending on the length of the vehicle. CESS is highest in diesel cars and comparatively less in petrol cars. But even in petrol cars over 1200cc, CESS is 22% irrespective of the vehicle's length.

3. Road Taxes are decided by the state government and therefore differ from state to state.

4. VAT is payable on all the cars, and a standard VAT charged is of 14%. 

Let’s understand with an example.

Mr. Arora is a resident of New Delhi, and he wants to purchase a car for himself (as well as his family). He is willing to buy Kia Seltos HTS IVT. So, he is eager to know the on-road price of the this car. Now have a look at the price and taxes:

Here it's clearly visible how expensive these cars get after adding the taxes.

The Bottom Line

The tax policy of the Indian government makes cars expensive in India. India has considered four-wheelers as a luxury and are taxed accordingly. A classic example is the Ford Mustang GT is priced in Dubai for 204000 AED, which is 38.5 lakhs in India currency, but in India, this car is priced at 74.6 lakhs, which is 93.7% more than Dubai.

This a big concern for the automobile sector and has hindered the performance of this sector. Many automobile companies are not able to meet the sales as per their expectations due to high taxes applied to their product, and this is also the reason why most families in India are not able to afford a car.

Hence this has severely affected the growth of the overall economy by slowing it down. The government, along with companies, should come up with strategies to manage the situation.

Since last year, the government has time and again affirmed that it will do its best to uplift the ailing automobile sector but, concrete measures are yet to be seen on ground. The lockdown has surely worsened the situation further. We must not forget that although Toyota has now agreed to expand in India, it had earlier refused to do so.

The reason has already been explained. Maybe it’s now time that the government shouldn’t wait for other automobile companies to suffer the wrath and get disappointed by the Indian market. But, will the sector get something drastically supportive anytime soon? We’ll have to wait and watch.