SUV tax regime to get streamlined, thanks to clarifications by Finance Minister Nirmala Sitharaman

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In Financial Year 2022, of the total sales of passenger vehicles (PVs), sales of Sports Utility Vehicles (SUVs) formed a smart 40 percent. According to industry experts, this number is expected to go north, going forward, thanks to multiple roll-outs, such as the all-new Brezza, Grand Vitara, Tucson, and Mahindra Scorpio-N.

SUVs comprise models from the sub 4 metre segment to the full-size luxury five- and seven-seater segment.

However, there’s a lot of confusion on the parameters governing an SUV for taxation purposes. Different states have different parameters that define an SUV. To set right this state of affairs and to provide clarity on what constitutes an SUV, Union Finance Minister Nirmala Sitharaman, on the sidelines of the GST Council meet, on 18 December, provided clarifications in this regard.

Moneycontrol delves into the finer details to bring you the real picture.

At present, petrol, liquefied petroleum gas (LPG) and compressed natural gas (CNG)-driven motor vehicles of engine capacity not exceeding 1,200 cc and of length not exceeding 4,000 mm, attracts 1 percent cess, while diesel-driven motor vehicles of engine capacity not exceeding 1,500 cc and length not exceeding 4,000 mm comes with 3 percent cess. These are in addition to the 18 percent GST imposed on these vehicles.

Furthermore, 17% compensation cess rate is levied on motor vehicles of 4 metres length and engine capacity not exceeding 1500 cc, while those exceeding 1,500 cc attract 20 percent rate of cess. ​. Motor vehicles of engine capacity over 1,500 cc, popularly known as Sports Utility Vehicles (SUVs), including utility vehicles (UVs), attracts 22 percent cess. All these cess rates are in addition to the 28 percent GST imposed on these vehicles. (See table below)

Sitharaman clarified that the higher rate of compensation cess of 22 per cent is applicable to motor vehicles fulfilling four conditions ―known widely as SUV,  engine capacity exceeding 1,500 cc, length exceeding 4,000 mm, ground clearance of 170 mm and above.  This is in addition to 28 percent GST that such vehicles attract.

Saurabh Kanchan, Indirect Tax Partner, Deloitte India, said, “The clarity will help address the divergent practices being followed across different states (in this matter), and which was deliberated for GST compensation rates. Given that all four conditions have to be cumulatively satisfied for the higher rate of compensation cess of 22 percent, this would be favourable for buyers where certain SUV models/variants are sub 4,000 mm or have engine capacity less than 1,500 cc, and thus do not qualify all four conditions cumulatively.”

Industry experts also reckon that certain sedan models may benefit from this clarification.

“This clarity also aligns with the earlier practice of different tax rates where under previous excise laws, a similar clarification was introduced to keep only SUVs, which satisfy all four conditions, in the higher excise rate of 30 percent,” he added.

The Federation of Auto Dealers Association (FADA) feels that the clarification on cess rates will have negligible impact on tax rates for the following reasons ― the rates on such vehicles before the clarification were the same, sales of mid-size and large SUVs are seen to be robust enough for the next few years and can withstand 1-2 percent price hikes.

If all four criteria are taken into consideration, none of the subcompact SUVs ― Kia Seltos, Maruti Brezza, Tata Nexon, Mahindra  XUV300 and Hyundai Venue ― would fall under the SUV category for the purpose of GST. That’s because all these models are under 4 metres in length and powered by engines of less than 1,500 cc. Even the Thar, which is widely accepted as an SUV, is 3,985 mm in length, and therefore, does not strictly fall in the SUV criteria.

A senior Maruti Suzuki official confirmed that the cess rates on Brezza remain unchanged.

Moving up to the C-segment SUV market, while the Creta, Seltos, Kushaq, Taigun, Astor,  Grand Vitara and Urban Cruiser Hyryder, are more than 4 metres in length, their engine displacements are below 1,500 cc. Hence, the highest cess rate is not applicable here too.

According to data from JATO Dynamics, a global automotive research company, at least 43 models belonging to the stables of various carmakers, will fall under the 22 percent (see table below) category. Best-selling models Scorpio-N, Hyundai Alcazar, and XUV700 meet all four criteria, and therefore, will attract the highest tax rates.