Indian government considering emissions-based tax on vehicles

27 Feb 2018 Anil Sharma, M.B.A.

The Indian government’s draft automotive policy indicates that the basis of taxation on automobiles is set to change if the government goes ahead its proposals. The government is considering imposing the goods and services tax (GST) cess (additional tax) on the basis of length and carbon dioxide (CO2) emission from fiscal year (FY) 2019. The defining criterion as of now is engine capacity and length. While the base GST rate remains unchanged at 28% for all passenger vehicles (PVs), the government has proposed reserving the 1% cess slab for vehicles that have CO2 emission of less than 155 g/km and length under 4 m. Vehicles with length less than 4 m but CO2 emissions higher than 155 g/km are likely to attract a cess of 15%. Similarly, larger vehicles with length of over 4 m but CO2 emission of less than 155 g/km could have a 15% cess, while the highest cess of 27% has been reserved for vehicles that are above 4 m and emit over 155 g/km of CO2, reports Business Standard.

Significance: As of now, peak taxation on vehicles is 53%, including 28% GST and 25% cess. As such, the proposed policy will increase the peak tax rate by 2%. In addition, the new rule will affect a lot of models by pushing them into the highest tax bracket. As of now, several models such as the Mahindra & Mahindra (M&M) Bolero, Scorpio, and XUV500 SUVs are taxed at 22% cess but will see an increase in tax rate to 27%, if the policy recommendations are implemented. The policy is aimed at promoting electric vehicles (EVs), which will fall under the 1% cess bracket. As market-wide adoption of EVs remains uncertain as of now, the policy may end up affecting prices of mass market products.

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