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GST rate on cars lower than pre-GST regime; auto cos should cut royalty payments: FinMin sources

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New Delhi:  Auto companies should cut costs by reducing royalty payments to their parent companies abroad instead of asking the government to reduce GST, finance ministry sources said on Thursday, responding to criticism on high taxes in India.

Most globally established companies in the sector have flourished in the current taxation and regulatory regime, which is evident from the huge royalty payouts made by Indian partners to their foreign parent firms, they added.

Toyota Motor Corp is not looking at further expansion in India due to the country’s high taxes, the firm’s vice chairman of India unit Shekar Viswanathan had reportedly said in an interview earlier this week.

Finance ministry sources said India’s tax policy regarding the automobile sector has been quite consistent for the last three decades now in the form of allowing foreign investment and incentivising domestic manufacturing.

GST rates on automobiles are less than what VAT and excise duty rates used to be in the pre-GST times. All of a sudden, dissent in some quarters on tax rates on automobiles is surprising, they added.

“In fact, these companies should cut down their costs of manufacturing by cutting down the royalty payments to their parent companies abroad instead of asking the government to reduce GST,” a source said.

Taxes on automobiles are in the highest bracket across the globe without much exception, the sources said.

Japan currently has three types of taxes on automobiles — once on the purchase, then an annual automobile tax based on engine size, and finally a weight tax at inspections required once every two years. Over and above this, there is GST at the highest end of the applicable rates, they said.

Also, in the EU, the base rate for VAT/GST on automobiles ranges from 20 per cent to 25 per cent.

The UK charges vehicle excise duties which vary with car emission norms and has 14 rate slabs. Besides, there are road usage charges. Further, high parking charges are common across the globe, they added.

Sources said vehicles, based on their high pre-GST incidence, were placed in the 28 per cent GST slab.

Passenger vehicles also attract compensation cess ranging from 1 to 22 per cent. However, even with compensation cess, the tax rate has not gone beyond pre-GST levels, except in few cases which were enjoying certain duty concessions, they added.

“Most of the countries provide certain concessions to electric vehicles. Given this, it would be unfair to claim that the GST rates in India are astounding or a demand dampener,” the source said.

Sources further said auto companies that make expensive cars are unable to generate demand in the domestic market as buyers are not interested. But there are many companies which have launched small cars at affordable prices and are able to sell their vehicles.

“If the regulatory environment was not conducive, it would be hard to imagine new players investing heavily into manufacturing facilities, like Jeep, Kia Motors and MG Motor, to name a few. Those companies which can feel the pulse of the Indian consumer and deliver accordingly are ruling the roost,” the source added.

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