The tax on luxury cars remains high not because of revenue implications, but optics

The tax on luxury cars remains high not because of revenue implications, but optics. 

This is essentially what an automotive CEO, who shall remain unnamed, said to me recently in an off-the-record conversation.

It’s widely believed that the tax revenue to the exchequer would actually increase if the taxes on luxury cars and SUVs were to be brought down – purely because the market would grow following a reduction in taxes. The direct tax implication aside, an improved market would also, according to luxury carmakers, encourage additional investment, as well as an expansion of dealerships and service centres that would increase employment. 

At the 31st meeting of the Goods and Services Tax Council on the 22nd of December 2018, in the national capital, the GST rates were slashed on a number of products – leaving just 28 items in the highest slab of 28%. The PM has said that 99% of all items are now in the 18% slab, or below. Luxury cars, of course, remain at 28%. Along with ‘sin’ items that include tobacco and alcohol. 

In addition to 28% GST, luxury cars are slapped with an additional cess of 22%, which brings the total tax to 50%. Remember, these are cars that are assembled in the country. Importing a luxury car will result in a total tax of anything from 125-175%.

The result of all this is that automakers such as Audi, BMW, Jaguar Land Rover, Mercedes Benz and Volvo (all of whom assemble cars in the country) only contribute about 40,000 units to the 4 million passenger cars and SUVs sold every year in the country – roughly about 1% of total sales. The question we have to ask ourselves is whether we can achieve our goal of a 10% contribution to the country’s GDP from the automotive industry if we continue to marginalise these global giants.

The trouble is that if the government reduces taxes on this segment of the industry, the opposition will jump at the opportunity of branding the government in power as ‘pro-rich’ and ‘anti-poor.’ So, while it may lead to more investment, growth, jobs, and a reduction in prices for the aspirational Indian car buyer – of whom there are many – none of that matters because the political risk of taking a rational decision in this case is far too strong.

It seems that optics outweigh good judgement yet again.