Tax bump

Luxury Cars Hit a Pothole in India

Hiking taxes on high-end vehicles sets a dangerous precedent for the nation's manufacturing ambitions.
Photographer: Sanjit Das/Bloomberg

First it was cigarettes that got stubbed; now it's the turn of SUVs to face an endurance test. By becoming a tinkerer's playpen, India's nationwide goods and services tax is emerging as a fresh source of uncertainty for business.

India's GST Council on Monday recommended an additional levy of 10 percentage points on luxury cars and sports utility vehicles, taking the total to 53 percent. The change comes barely five weeks after the value-added tax replaced a plethora of federal and state levies. Last month, a similar bump in cigarette taxes spooked investors.

Imagine yourself at the London headquarters of Fiat Chrysler Automobiles NV. How would you have felt about Indian news reports in July that the Jeep Grand Cherokee, prohibitively priced at $147,000, was now 20 percent cheaper thanks to GST? Good fortune in a growth market? Time to ramp up production? Maybe even use India as a global manufacturing base?

Riding High

Sales of imported SUV brands in India have squeezed out those of luxury sedans

Source: Society of Indian Automobile Manufacturers, Bloomberg, Gadfly calculations

Any such optimism would have been premature. New Delhi's move, announced in a press release on Monday night, will damp demand for more expensive cars. The fiddling also sets a dangerous precedent.

The bureaucrats running the migration to India's GST are attempting to finish off an entire aviary with one stone. They want nothing consumed by the common man to become more expensive; nothing used by the elite (including sports utility vehicles) to become cheaper; tax collections to remain at least the same; overall inflation to stay stable; and for India to gain manufacturing competitiveness.

Trying to reconcile all that was always going to leave some anomalies. Rather than laugh them off, the council, led by the finance minister, has taken to going after them one by one.

That's a road lined by ever-increasing levels of complexity, never a friend of efficient tax collection.

For instance: When is a farm vehicle an SUV? While a Lexus RX with rear-seat entertainment systems is clearly a luxury vehicle, Mahindra & Mahindra Ltd.'s high-riders range from cars aimed at semi-commercial rural users to ones that wouldn't appear too downmarket in Mumbai's more fashionable suburbs. Regulatory arbitrage of this sort has long driven the SUV market.

Luxury cars, meanwhile, make up a vanishingly small share of India's car sales. Just 692 premium and executive cars were sold in June, about a half of one percent of the total passenger car market, according to data from the Society of Indian Automobile Manufacturers.

Global investors could have written off the markup in cigarette taxes as a strategy to safeguard public health. No such justification exists for cars, an industry that can create those "Make in India" jobs Prime Minister Narendra Modi's government so badly wants.

King of the Road

Indian car buyers are giving up on premium cars, but they still love imported SUV brands

Source: Society of Indian Automobile Manufacturers, Bloomberg, Gadfly calculations

Note: Rebased. 2012 calendar year average monthly sales = 100.

Shekar Viswanathan, vice chairman of Toyota Kirloskar Motor Pvt., told the Mint newspaper that he can't show his face now to his principals in Japan. Mercedes-Benz's India chief said he feels "deprived."

Already, India's GST is a compromise. It has five slabs, whereas most other countries that tax consumption do so at a single rate. Small businesses are grumbling about the 37 filings required from them in a year. Not only will constant tinkering make India's new regime even more cumbersome, it will make capital allocators at global corporations anxious.

If tax rates can change so frequently before business has even had a chance to fully figure out pricing and future investment plans, what's to say they won't keep changing in future?

-With assistance from David Fickling.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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