The Union Cabinet today officially approved the hike in the Goods and Services Tax (GST) cess on luxury cars and SUVs to 25 percent from the earlier 15 percent. The decision follows the GST Council's recommendation made to the central government earlier this month to move legislative amendments required for the hike in the upper limit of the cess.

Just over a month after GST came into effect, the council had approved an upward revision of the cess on certain categories of cars; a move that would bring about yet another dramatic change in prices. The proposal to raise the cess came after the GST council realised that the total tax incidence on motor vehicles was lower post GST, as against the tax incidence before the implementation.

Under the original GST code, cars were to be taxed at a flat rate of 28 percent, with an additional cess ranging from 1 to 15 percent levied depending on vehicle category. The revision stipulates cars and SUVs over four metres in length, and engines larger than 1,200cc (petrol) and 1,500cc (diesel) will now be levied cess to the tune of 25 percent.

The GST Council is yet to decide on the date from when the increased cess will be applicable as well as the actual increase in cess rate. A decision is likely to be taken in the next meeting of the panel that is scheduled to be held on September 9.

"Passing of ordinance to increase the limit of cess to 25 percent, on certain class of vehicles, is along the expected lines.What is critical to the industry is when, how much and on what criteria will the cess be increased," Pawan Goenka, managing director, Mahindra & Mahindra said.  

As a result of the increase in cess, manufacturers will be forced to reverse price cuts that were implemented when GST was introduced.

Many carmakers said the hike will force them to rework their strategy, thereby impacting long-term planning. Luxury carmakers such as Mercedes-Benz India and Audi expect sales to decline at a time when luxury car sales were gathering momentum.

The expansion in demand, due to the price cuts, would have enabled further investments in local manufacturing and job creation, Rohit Suri, president and managing director, Jaguar Land Rover India said. "We hope the GST Council will desist from raising the cess and putting a dampener on the positive momentum in demand that the industry had started to witness since 1st July,” he added.

Auto industry body Society of Indian Automobile Manufacturers (SIAM) said that the move will have a negative impact on sales. "This is a contradictory position of the government that while on the one hand it has identified the automotive industry as a sunrise sector of Indian economy, on the other hand it is being treated as a demerit product," according to its official statement.