From Mercedes-Benz to BMW, Jaguar Land Rover & Audi: How does GST rationalisation impact luxury cars?

The luxury cars have attracted the highest tax rates till now.

The cars of luxury brands like Mercedes-Benz, BMW, Jaguar Land Rover (JLR) and Audi are expected to become slightly affordable in India following the Goods and Services Tax (GST) Council's move to rationalise the levy and remove the compensation cess.

As part of the GST rationalisation, only two slabs -- 5% and 18% -- remain now. The GST Council has abolished the 12% and 28% slabs. Besides, a new 40% slab has been introduced for luxury and sin goods.

Earlier, all the internal combustion engine (ICE) cars attracted a GST of 28%. On top of this, there would be a compensation cess ranging from 1-22%.

For luxury cars, the compensation cess would be from 17-22%, depending on the model and engine size, effectively bringing the total tax to 45-50%. Just for reference, the ex-showroom price of any vehicle included GST and compensation cess till now.

Historically speaking, India has had one of the highest tax rates for luxury cars, making them far more expensive compared to other global markets.

The new tax structure would kick in from September 22, the first day of the nine-day Navaratri festival. As per the GST Council, the luxury cars will now fall under the new 40% slab.

Since the maximum rate that can be levied on any item under the new GST regime is 40%, the total tax will now be capped at 40% for the luxury cars, instead of 45-50%.

A drop of 5-10 percentage points in tax will lower prices of luxury cars in India, sector analysts said, adding that the benefit will apply across all luxury brands such as Mercedes-Benz, BMW, JLR and Audi.

A couple of luxury car dealers said that the demand will rise and there will be more interest from first-time buyers in the premium segment with lower taxes.

Although India is now the third-largest car market in the world, the contribution of luxury models is only around 1%. A top-ranked executive at a luxury car brand recently told Moneycontrol that the share of luxury models in India's total car sales should at least be 3%.

One of the sector analysts said that the new GST rates may help expand the share of the luxury models, making the market more attractive for both buyers and manufacturers.