Changes in tax rates should be done after due deliberation and not in haste

Sin tax of 28 per cent was acceptable on luxury items under the goods and services tax (GST) that became operational on July 1. On top of it, levying 15 per cent cess as part of revenue mobilisation drive to compensate states was also reconcilable.

The principle of rich and well heeled pay more taxes was perhaps the basis for putting automobiles in the highest tax bracket, especially luxury cars and sports utility vehicles.

Perhaps, this principle and the thinking behind it seems to have been stretched a little too much. Decision of GST Council headed by finance minister Arun Jaitley to push up the cess to 25 per cent on luxury cars, sports utility vehicles, mid-sized and large cars warrants a revisit.

There’s no reason why any manufacturer of even a luxury car should collect over 50 per cent the value of the automobile as tax that’s eventually passed on to consumers. Globally, no territory or geography has ever accepted highest tax rates in all forms, GST and cess, beyond 50 per cent. Only exception to this principle has perhaps been tobacco, liquor and such.

 GST Council decision last week to push up the cess by a whopping 10 per cent in just one month after roll out of a single impost seems rather illogical and sans rationale.

Justification offered by finance ministry for the latest revision in GST rate and cess on large cars was revenue neutrality, a principle applied across the product spectrum. If revenue considerations were a factor, then where’s the consistency in thinking within the GST Council?

In the first place, GST Council was fully aware that tax incidence on luxury and large cars would be lower at 43 per cent from earlier 54.72 per cent, plus road tax, octroi and two per cent CST.

 Over all thinking within the establishment was to bring down tax incidence across products and services to push up consumption demand, reduce transaction costs, prune the inordinate delays faced on inter-state movement of goods etc. Large, luxury and sports cars were no exception to this principle.

Volume growth in automobiles coupled with exports to third country destinations were to take care of revenue losses booked in the short term if any, provide jobs in the Indian market and give a big boost to made in India initiative of Narendra Modi government.

As a consequence of lower taxes, most automobile companies immediately announced price cuts on most large, luxury, sports and mid-sized segment cars. Price cuts ranged between Rs 1.1 lakh to Rs 3 lakh depending on the brand, make, range etc. These price cuts gave a big boost to the domestic automobile market sentiment in the short term.

But a 10 per cent cess increase in less than one month has dampened the spirits of most luxury car makers, who are even rethinking their long term investment plans for India and committing funds in this market. Bringing back the distortions in taxes prevalent in pre-GST days should be shelved.

If the government were to provide booster dose to electric cars or hybrid vehicles, the better idea would have been to slash applicable GST rates and cess rather than pushing up tax incidence on large and luxury vehicles. The latest measure will not only lead to postponement of investment plans by big global brands but delay the maturing of Indian automobile market that has grown handsomely in the last 20 years. Quick changes in tax rates would not only bring about distortions but also lead to delay in transfer of technologies by global players.

Changes in tax rates on any product or service should be attempted after due deliberation and not in haste. GST’s ultimate objective to reduce incidence of taxes should be pursued vigorously.

Great philosopher and economic thinker Chanakya’s principle of limiting the tax collections on any section of consumers must be the guiding principle.