New Delhi, August 21, 2017

The ordinance will allow the government to hike GST cess on luxury cars and SUVs to restore tax revenue from the auto industry

The government is set to promulgate an ordinance within weeks, allowing an increase in goods and services tax (GST) cess on luxury cars and SUVs, as it seeks to restore tax revenue from the automobile industry that unintentionally got affected in the transition to the new indirect tax regime.

A person aware of the discussions in the finance ministry said on condition of anonymity that a cabinet note is being moved proposing changes to the schedule of cess levied under the GST (Compensation to States) Act, 2017, to correct the reduction in tax burden on cars due to GST rollout.

The GST Council, however, has taken the view that tax rate revisions during the transition to the new indirect tax system that kicked in from 1 July will be limited only to correcting unintentional effects of the tax rate fixing exercise.

The finance ministry on 7 August said the Council chaired by finance minister Arun Jaitley had recommended to the central government to move legislative amendments needed for raising the maximum ceiling of cess that can be levied on motor vehicles including sports utility vehicles (SUVs) to 25% from the present 15%.

The move to issue an ordinance suggests the urgency with which the government would like to bring into effect an increase in the cess.

“Only after the ordinance has been passed, the Council can decide what should be the quantum of increase needed. The outer limit suggested is 25%,” said the person.

The Council will also consider at its next meeting, on 9 September in Hyderabad, any other issue coming up from the experience of GST payment and filing of returns, as well as suggestions coming up during the meeting of chief commissioners of Central Board of Excise and Customs (CBEC) in the first week of September.

Makers of SUVs and luxury cars have criticized the GST Council’s plan to raise the cess, warning the move will lead to production cuts and job losses and dent the “Make in India” initiative. “Businesses have to realize one thing. The Council’s effort was to keep tax rate fixation as revenue neutral as possible. This (reduced tax burden on cars) is an unintended mistake that needs to be corrected. Where the reduction is intentional, there is no rate revision,” said the person cited above, adding that the Council consciously kept GST rates lower on many items so that the common man benefits from the new tax system.

“We need to accept, while introducing a major tax reform like GST, there would be cases where GST rates could be more or less than erstwhile taxes in a few cases and if it is so due to a process of rationalization, we need to leave them as it is,” suggested R. Muralidharan, senior director, Deloitte India.