The high rate of taxation is considered a major challenge for the Indian auto industry, especially for the luxury car segment, which hasn’t been able to grow beyond 1%, despite demand growth. Budget 2021 is expected to bring a breather for the segment.
Finance minister Nirmala Sitharaman is about to present the Union Budget 2021 on 1st February, which is going to be a very important one bringing several measures that would revive the country’s ailing economy hit by multiple factors like – global meltdown, Coronavirus crisis, severe nationwide lockdown, etc. The auto sector is a major revenue churning segment for the government and being one of the largest manufacturing industries is seeking a breather in form of several steps from the Budget 2021.
The luxury car market is the aspiration segment in the Indian auto market that couldn’t grow more than 1% so far. Even if there is an increased demand for luxury cars and young buyers showing interest in the luxury car brands, the segment faces headwinds when it comes to the topic of growth. One of the major reasons, the industry stakeholders blame it to is the high tax.
Audi India head Balbir Singh Dhillon says the luxury car segment is recovering in 2021 from the disruptions that have been induced by the Covid-19 pandemic. According to him, one of the challenges the industry faces is the high taxation on luxury cars, including cess. “That remains a challenge because what it has done is that it has not let luxury cars grow beyond 1%. It is just hovering around 1% and in the last year 2020 it could have dropped probably 0.7-0.8%,” Dhillon added.
India’s largest luxury car brand Mercedes-Benz too echoes the same tone. According to Martin Schwenk, Managing Director and CEO, Mercedes-Benz India, anything which is a deterrent to the demand in the sector the industry stakeholders should stay away because at the end that will cause a problem. He believes that the auto industry is already highly taxed, especially the luxury car segment, from import duties to GST and cess. At present, luxury cars attract a 22% tax.
Schwenk expects the upcoming Budget 2021 would focus on this issue and provide some relief to the industry by reducing the tax. “I think the target should actually be to support the growth of the sector and reduce tax. We should try to find an avenue,” he added.
Automobiles in India attract 28% tax under the GST regime with additional cess ranging between 1-22% depending on vehicle type.
Another luxury car brand Lamborghini too expects the Budget 2021 would bring some breather for the segment with tax reduction measures. Lamborghini India head Sharad Agarwal said that the super-luxury segment players expect the government to maintain consistency because this segment has suffered a lot in 2020.
As he said, the luxury car segment is expected to bounce back to at least the 2019 level in 2021. “We are still not expecting growth to come back but we want to touch 2019 level in the segment,” said Agarwal. He also points out that if the government decides to increase tax in the segment it will hit the luxury car industry in India very negatively.
In the last three years, there has been consistency in terms of tax structure for the luxury car segment. Lamborghini expects that consistency will be maintained. He also said that taxation is one of the major factors affecting the growth of the luxury car segment and the current sales numbers do not reflect the potential of this space. “Any increase in taxes will impact growth,” he added.
Presently, automobiles in India attract 28% tax under the Goods and Services Tax (GST) regime with additional cess ranging between 1-22% depending on the type of the vehicle. Cars that are imported as Completely Built Unit (CBU) draw customs duty ranging between 60-100% depending on their engine sizes and cost, insurance, and freight (CIF) value being less or above $40,000. As the majority of the luxury cars sold in India are imported from overseas, they are placed in this slab and slapped with a high rate of tax.
In all, the auto industry expects relief in multiple areas including direct and indirect tax from Budget 2021. Apart from that, the industry players are hoping for various policy-level initiatives as well.
As in the post-lockdown period, there has been a surge in the preference towards personal mobility instead of using public transport medium, the first time vehicle buyers can witness a boost if the government and GST Council could make the cars cheaper by reducing the GST rate to 18% from present 28% and reducing the compensation cess rates, at least temporarily of not permanently.
Also, according to experts, removal of the restrictions to avail the input tax credit of GST paid on the vehicles for businesses would make the automobiles cheaper and affordable when used for business purposes. This will eventually boost the sales of vehicles. Also, it will fulfill the basic intention of GST to eliminate the cascading of taxes. With this move implemented, the demand would grow in the segment, which will eventually help the government with revenue increase as well.
In the last few months, the Indian government has been focusing on important areas like boosting disposable income to encourage consumers to spend more on consumption. Also, there has been a growing focus on improving the supply chain for the industry. The upcoming Budget 2021 is expected to be a further boosting step for the sector.
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