Explained: Are automakers, including Toyota, right in complaining about high taxes in India?

With no clear outlook on demand revival, the clamour for a cut in taxes on automobiles has become louder than in the recent past. Auto companies are asking the government to review these taxes, which some claim are among the highest in the world. Let's take a look at what really is the issue.

What is the Toyota issue?

In an interview given to Bloomberg, a senior official of Toyota Kirloskar, a subsidiary company of Toyota Motor Corporation, advocated an urgent need to cut taxes on automobiles in India. He went on to state that all future investments by Toyota have been put on hold, accusing India’s tax structure as being ‘we don’t want you here’.

Within a few hours though, the Bengaluru-based company changed tack and issued multiple statements that it remains committed to India and instead of halting investment has lined up Rs 2,000 crore for the country in areas like electric vehicles.

What is the tax structure in India?

All vehicles (except electric vehicles) carry a GST of 28 percent. Different quantum of cess ranging from 1 percent to 22 percent is added after adding GST. This takes the applied duty to within a 29 percent to 50 percent. Passenger vehicles powered by petrol, CNG and LPG engines not bigger than 1.2 litre and which are not longer than 4 meters are taxed at 29 percent. SUVs powered by engines bigger than 1.5 litre and longer than 4 meters are taxed at 50 percent.

Two-wheelers having engines bigger than 350cc are slapped with a cess of 3 percent, taking the total tax on them to 31 percent.  10-13 seater public transport vehicles are taxed at 43 percent, including a 15 percent cess.

Electric vehicles (EVs) do not carry any cess but only a GST of 5 percent. The government in 2019 slashed the GST on EVs from the earlier 12 percent to boost EV adoption.

What was the tax structure before GST?

Before GST was adopted in 2017, the automobile tax structure was not dramatically different. Excise duty, auto cess and VAT (12.5%+1.1%+14%) totalled to nearly 28 percent. Bigger SUVs, cars and luxury vehicles were taxed between 42%-45%. Road Tax and Motor Vehicle Tax was a state subject and thus varied.

The total tax on two-wheelers having engines less than 350cc went down after the adoption of GST. From 30 percent (excise duty, VAT and cess) the current total tax on two-wheelers is 28 percent comprising just GST. Bikes with engines bigger than 350cc have seen an increase of 1 percent to 31 percent compared to pre-GST levels.

How much are cars taxed in other countries?

In the European Union cars carry VAT which ranges between 19-27 percent. Sales tax, registration taxes and taxes on vehicle ownership which includes vehicle weight, engine power and capacity, CO2 emission, fuel consumption vary from country to country bringing the overall tax to around 25 percent.

China, the world’s biggest automotive market, taxes cars in the range of 1 percent to 40 percent depending on the size of the engine. The US, the world’s second largest auto market, levies a registration fee ranging from $26 to $100. The US does not impose a VAT. Instead the individual states and local jurisdictions have been given authority to levy sales and use taxes against purchase.

Why is the tax cut important now?

The need for a cut in taxes is felt more severely now than ever before because of the freefall in demand. Following the COVID-induced lockdown, carmakers are still limping back to normalcy with no certainty of demand ahead.

The Society of Indian Automobile Manufacturers (SIAM) has made several pleas for a cut in GST since last year but the tight-on-budget government has remained unmoved. The Centre did however say that two-wheelers do not deserve to be classified in the ‘sin and luxury goods’ category and thus should carry a lower tax. So far no decision has been made on it.

Why is Toyota demanding a tax cut?

The slowdown has hit the large car models more than compact ones, thereby creating further uncertainty for certain companies like Toyota which does not have a compact car developed by itself. Toyota has traditionally been dependent on bigger models such as Fortuner, Land Cruiser and Innova.

With the switchover to Bharat Stage VI Toyota completely exited the compact car space and also the entry mid-size sedan segment where it used to sell the Etios and Etios Liva. Toyota borrowed the Baleno from Maruti Suzuki to sell it as Glanza and is laying the groundwork for launching the next model Urban Cruiser which is essentially a rebadged Maruti Suzuki Brezza.

Is Toyota right in complaining?

Toyota may not be entirely right in demanding a tax cut. Despite entering India in 1997, Toyota has failed to develop even one best-seller in the hatchback segment. The segment generates more than half of India’s annual car volumes.

Riding on just three models, Korean car brand, Kia Motors, sold nearly two times more than Toyota in August. The Japanese company has an eight model line-up in India. Having entered India only in mid-2019, Kia has already grabbed a 5 percent share of the passenger vehicle (PV) market by the end of August. In comparison, Toyota, having entered India 23 years ago, has a PV share of just 2.57 percent.