GST hike on SUVs unlikely to put a brake on auto sales

The GST hike on SUVs may have a negligible effect on overall sales. Industry observers say demand for MPVs makes up for less than 12% of auto sales and that could be the reason for the effect being very limited on the auto sector. 

The GST council in its 50^th meeting decided to revise the tax structure for various industries. This included redefining the Sports Utility Vehicle (SUV) segment and levying an additional 2% cess, which now takes up the total cess to 22% from the existing 20%. The levy is in addition to the 28% GST rate for vehicles sold in India.

The GST council has included all Utility Vehicles— SUV, MUV, MPV, and so on. It defines all vehicles that measure more than 4000mm in length, have an engine displacement of more than 1.5 litres, and with a ground clearance of 170mm or more will attract a 22% compensation cess over and above 28% GST. This move once implemented will make the select SUVs, one of the highest taxed products in the country at 50% (22% cess + 28% GST).

While the contours of the revision is still being carefully studied by the industry, potentially around 10 vehicle MPVs sold in the country by 6 carmakers will see a slight increase in prices. In fact, as per data compiled by JATO Dynamics, if one looks at the sales trend in India, MPVs accounted for less around 12% of the total passenger vehicle sold in India in FY2023. For the period YTD, the share of MPVs in the overall PV sales has come down to 11.2%.

Some of the popular MPVs sold in India that could come under the new tax revision include –

Move sees a mixed reaction

Responding to the GST revision, Mahindra & Mahindra in an email said, “We are evaluating details of the changes announced by the GST council on GST rate changes, for certain types of SUVs/ MUVs. The change relates to a recategorisation of GST rate, based on unladen ground clearance, versus current laden ground clearance criterion. We await the official notification related to this change, which should also include the definition of unladen ground clearance and process to measure the same. Once received, we will approach the certification agency for potential recertification of the relevant models, based on the updated definition, if necessary. We are working through SIAM with the appropriate authorities.”

On the other hand, it is important to understand that the GST revision on Utility Vehicles based on technical specification is a bit contradictory to the ground realities. The demand for SUVs is not just primarily driven because of the premium factor, but also due to reasons such as people movement for big families, poor roads leading to demand for higher ground clearance, water logging issues and visibility among others.

An interesting observation could be the fact that a vehicle such as Maruti Suzuki Ertiga, which is not a luxury vehicle could now attract more GST than a luxury product such as a Mini Cooper or a Mercedes-Benz GLA.

Globally, the demand for SUVs has been on the rise, and while this move would have a negligible impact on retail sales, it would also lead to higher tax revenue for the government.

At the same time, industry stakeholders says that the GST council should have revised the tax bracket on entry-level two- and four-wheelers which have been under stress to make them more affordable and hence help drive sales.

Maulik Manakiwala, Partner- Indirect Tax, BDO India, “The criteria of determining the rate of compensation cess on utility vehicles has been amended. While the conditions of technical measures of engine capacity, ground clearance, and length of the vehicle are retained as they are, the requirement of the vehicle being ‘popularly known as Sports Utility Vehicle (SUV)’ has been removed and any vehicle known as utility vehicle would be treated at par for levy of compensation cess (subject the meeting criteria of engine capacity, ground clearance and length). This addresses the lack of clarity on the determination of the rate of compensation cess for vehicles popularly known as Multi Utility Vehicles (MUV), which had all the characteristics of an SUV but were not popularly known as SUV. This is a much-awaited clarification for the auto industry.”