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In the goods and services tax (GST) regime, India levies one of the highest taxes on vehicles among key world markets when compared with the GST equivalent value added tax (VAT) levied in other countries.
Cars and two-wheelers attract a GST rate of 28% in India and a cess that ranges from 3% to 22%, taking the effective tax rate to up to 50%. The GST issue on automobiles ; that has often been a contentious issue between auto firms and policymakers, was back in the spotlight last week.
A note by an unnamed finance ministry official spurned the proposal for a rate cut put forth by the industry. GST rates on automobiles under the current tax regime are less than what VAT and excise duty rates used to be.
The total cost of ownership in India is the highest among key markets of the world. India is today the fifth biggest market but it’s mainly driven by low-priced vehicle as taxes on big cars are too high. The penetration of vehicles is low at 33 cars/1,000 households and is expected to increase to 110 cars/1,000 by 2050.
For the sake of comparison, the study includes only the taxes levied before the vehicle leaves the showroom. It excludes charges borne by buyers after purchase. This includes registration, road tax, insurance charges and ownership tax, among others.
Countries such as South Korea, China, Russia, the US, the UK, Japan, France and Germany, in addition to the basic VAT, have their own taxation framework, shows a study on tax rates compiled by the European Automobile Manufacturers Association (ACEA).
Favouring the argument of a GST cut by auto companies in India, in the current times, the objective should be to improve aggregate demand in the economy. An increase in demand would improve the overall economic activity and generate employment which would further push the demand up in a snowballing effect. Speed is the essence here so that base economic activity is preserved and not allowed to dry down due to lack of demand.