Mar 26, 2013 09:27 AM IST | Source: CNBC-TV18

SUV tax: Is it logical and justified?

A Mahindra Bolero will cost you around Rs 8 lakh. A Mercedes-Benz S-class will cost you around Rs 90 lakh. But according to the government, you will have to pay more tax on buying a Bolero, than the S-class.

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A Mahindra Bolero will now cost around Rs 8 lakh and a Mercedes-Benz S-class will be worth Rs 90 lakh. But according to the government, one will have to pay more tax on buying a Bolero, than the S-class. CNBC-TV18's Ronojoy Banerjee tries to explain the logic behind this bizarre SUV tax that was imposed in the Budget and why the government is being forced to consider issuing a clarification.

Also read: Hike in excise duty could hurt UV sales, says M&M's Goenka

On Budget day, February 28, P Chidambaram, Finance Minister on had said, “SUVs occupy greater road and parking space and ought to bear a higher tax. I propose to increase the excise duty on SUVs from 27 percent to 30 percent."

While the FM has continued to defend the Governments decision to impose a higher duty on what are popularly called SUV's, the Government realises it may need to issue a clarification to exempt some inadvertent casualties.

If one were to go by the Finance Bill’s definition of what qualifies as an SUV, even Sedans like Maruti's SX4, Honda's Civic and Toyota’s Corolla stand to be impacted. The finance bill set four parameters based on engine and seating capacity, ground clearance and length. This muddied waters, as the Motor Vehicle Act is silent on a SUV category.

To correct this inadvertent error, FinMin sources say the government is set to issue a new definition of what qualifies as an SUV, essentially if a 4 wheeler is a 2-box, which means its doesn’t have a boot like a sedan, the Government will impose the higher SUV tax.

Pawan Goenka, President-Automotive Business, Mahindra and Mahindra had responded post Budget on March 1, he said, "I am still hoping that the FinMin will look at this criteria because that is a criteria that perplexes me and something that should be a merit, is becoming a demerit.”

The inexplicable ruling to tax only SUVs becomes even more bizarre when one finds that Mahindra's Bolero would now have to pay a higher excise duty than a Mercedes-Benz S class which attracts a duty of 27% even though a Bolero costs less than one-tenth of the latter. Or that Tata Motors Sumo which is used in rural areas will now be taxed higher than an Audi A6.

Industry sources also say the rationale used by the FM to tax SUVs higher because "they occupy greater road and parking space" also falls flat since the luxury sedans typically are lengthier than popular SUV's like the Xylo or Tavera though they are wider.

The ensuing confusion has the industry worried. They are pushing the finance ministry to increase the ground clearance limit from 170 millimeters (mm) to 200 mm and exempt vehicles below Rs 12 lakh or less. Even if there is an exemption based on price as the industry wants the finance ministry will have to agree that they could have dealt with this issue with a little more logic and finesse.

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