SUV, sedan prices set to drop after proposed GST rate cuts: Report

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Vehicle prices across segments, including sedans and SUVs, could see significant reductions as the upcoming cut in Goods and Services Tax (GST) on automobiles is expected to decrease from the current rate of up to 50% to a proposed 40%, ToI quoted sources as saying. However, there is a fear of additional cess on luxury and higher-end cars, the report added.

The development emerged from a ministerial panel meeting on rate rationalization held Thursday, where discussions centered on restructuring the tax framework for luxury and sin goods. Currently, SUVs and sedans exceeding four meters in length with engines above specified capacity levels face a combined 50% in taxes — 28% GST plus 22% cess.

ToI report stated that some states pushed for maintaining a cess structure even with the reduced 40% rate during the meeting. The GST Council, headed by Union Finance Minister Nirmala Sitharaman, will finalize the decision next month with the Centre reportedly favouring a flat 40% levy without additional cess, the report said.

ToI report quoted government sources as saying that the existing cess was originally introduced for five years to compensate states for revenue losses during GST implementation, and later extended for three more years due to Covid-related disruptions.

The tax reduction would benefit all vehicle categories differently. Reportedly, small cars and two-wheelers are expected to see rates drop from 29% to 18%, while SUV buyers may experience higher absolute savings in value terms.

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All internal combustion engine vehicles, including diesel, petrol, and hybrid variants, would benefit from reduced rates, the report said. This change would narrow the tax differential with electric vehicles, which currently attract 5% GST.

The report quoted industry observers saying that the move could discourage EV adoption, particularly in price-sensitive two-wheeler segments. And added that the GST gap between conventional and electric two-wheelers would shrink from 23 percentage points to 13 percentage points.

The report quoted government sources suggesting that competitive pressure and sluggish sales may compel manufacturers to pass on the advantages to boost demand.