India's SUV tax: missing the point? | beyondbrics

Is that an SUV or not?

Last month, India?s finance minister Palaniappan Chidambaram upped the excise duty on sports utility vehicles (SUVs) from 27 per cent to 30 per cent in the Union Budget.

But now, India?s minister for heavy industries, Praful Patel, has written to the finance minister asking him to withdraw the tax hike, after the auto industry reported the worst monthly sales figures in a decade.

In his budget speech, Chidambaram justified the increased tax for SUVs, saying: ?SUVs occupy greater road and parking space.?

Of course, industry leaders didn?t buy that rationale. Anand Mahindra, chairman of Mahindra & Mahindra, which controls half India?s SUV market by sales, tweeted on February 28:

No quarrel if ALL large cars taxed.Singling out SUV's destroys a level field.Sad,one has to fight harder to succeed in one's own country

In his letter, Patel looked to protect the industry:

The Auto Industry is going through difficult times and hence any increase in levies at this juncture will have a negative impact on the Industry.

Sales of passenger cars were down 26 per cent year-on-year in the month of February, according to industry figures published on Monday.

SUVs have been the one category to buck this downward trend. Between April and February, SUV sales increased 55 per cent compared with the same period a year earlier. That?s partly because they?re fashionable in India and partly because SUVs generally run on diesel, which has historically been subsidised by the Indian government.

So, Patel?s letter is an attempt to clutch on to this small element of growth for the sector. His rationale is that some SUVs aren?t luxury goods ? they are a necessity for those outside urban areas, so the tax hike doesn?t work in targeting the better off.

?Patel said there are a lot of SUVs that come under the duty ? the Mahindra Bolero and Tata Sumo ? that are lower end and cost less than Rs10m,? a government spokesperson told beyondbrics. ?Patel is saying to do away with the additional duty for SUVs costing Rs1m or less, as these are used in rural areas ? public transport everywhere is not well developed.?

The second point in the minister?s letter is that SUVs are currently facing a double dose of fiscal burden. As the government gradually lifts its diesel subsidy, owners are already facing an added cost which has a knock-on effect on the auto sector in terms of demand.

Patel points out that the cost of diesel in India will reach the market price in a year. His second suggestion:

It would be a good gesture to the Industry if a statement can be made that this additional 3% excise duty on SUVs would be removed next year. This request is being made on account of the Auto Industry?s keenness to have clarity on the diesel policy of the Govt.

On the other hand, Deepesh Rathore, an analyst at IHS Automotive, sees a percentage point increase in tax as having little impact on sales. ?The buyers of utility vehicles can afford the 3 per cent more but at the same time, I don?t see a significant growth in government revenues because of this tax increase?.

The real problem, according to Rathore, is the government?s definition of an SUV.

?The government defined small cars in its own way separate to global norms and now it has done the same for SUVs?, he said. ?It sends the wrong message that regulation in India is volatile. And from what I understand, anything above 4m in length and with ground clearance of more than 170mm is defined as an SUV. This means a number of cars also meet that norm as anyone designing a car for India, because of the number of potholes on our roads, would want 170mm ground clearance.?

Related reading:
India car sales weakest for a decade, FT
India?s budget: investors fall out of love with Chidambaram, beyondbrics
India witnesses SUV boom, FT

Source: http://blogs.ft.com/beyond-brics/2013/03/13/indias-suv-tax-missing-the-point/

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