Excise-Tax Increase Upsets Indian Vehicle MarketExcise-Tax Increase Upsets Indian Vehicle Market

MUMBAI – In introducing the federal budget for 2013-2014 on Feb. 28, India’s finance minister increased the excise tax on domestically produced SUVs from 27% to 30%. Nicknamed the SUV tax, it is the highest excise-tax bracket.

“The tax is aimed at SUVs that occupy large road space and create congestion,” says P Chidambaram.

Despite its nickname, and the finance minister’s specific reference to SUVs, the levy covers all passenger vehicles longer than 13.1 ft. (4 m), with diesel or gasoline engines of 1.5L or more and having a ground clearance of 6.7 ins. (17 cm) or better. Small buses with at least nine seats are excluded.

The definition was so hastily formulated that the SUV Tax has thrown the market into disarray. Neither the government nor auto makers know exactly what is taxed at the increased rate and what is exempted.

The tax aims at SUVs, but sedans such as the Maruti SX4, Toyota Corolla, Honda Civic and Fiat Linea, as well as most super-luxury vehicles, also are trapped in the tax net.

At the same time, compact SUVs and multipurpose vehicles such as Maruti’s 7-seat Ertiga or Nissan Evalia will not be taxed at the higher rate. Renault’s highly successful gasoline-engine Duster is subject to the 30% tax, but the diesel-powered Duster will be exempt. The new- generation compact SUVs and MPVs such as the Chevrolet Enjoy and Ford EcoSport also will escape.

According to WardsAuto data, light trucks (SUVs, MPVs, utilities) are the only segment showing robust growth in India over the past 27 months: 17.3% in 2011, 19.9% in 2012 and 16.2% in the first three months of 2013 compared with cars trailing at 4.2% growth, 1.7% growth and 19.1% decline, respectively.

The new tax will severely affect light-truck sales in an already-declining market.

Auto makers question Chidambaram’s logic. The finance minister says in his budget speech that 98% of SUVs use less-expensive diesel fuel and deserve to be taxed at the higher rate, but he is silent on the fact that so many diesel-powered light vehicles are exempt.

Says Pawan Goenka, automotive sector president-Mahindra & Mahindra, “If the intention was to tax diesel users, it could have been done simply and (directly).”

But the budget and tax proposals, including the SUV tax, were passed as a package by the Parliament on April 30 without discussion or consideration of their merits or consequences. Auto makers and legislators had no opportunity to address the government.

Ground clearance, for example, is a factor in tax calculations for the first time, but no one was able to explore its relevance to traffic patterns or vehicle markets.

The SUV tax will apply to eight of Mahindra’s portfolio of 10 vehicles, with the exception of Quanto hatchback and Verito sedan; of Maruti’s portfolio of 15 vehicles, 12 will escape the tax net.

Goenka estimates the SUV tax will raise additional revenue of Rs10 billion ($188.7 million) annually for the government. But S Sandilya, president of the Society of Indian Auto Manufacturers, says the tax tinkers with designs in a difficult year for the industry and is uncalled for.

In addition to the anomaly of levying a tax aimed at SUVs and MPVs on many sedans while exempting some of the targeted vehicles, the government appears to be complicating things further, it reportedly is considering adding an even more confusing criterion: a hatchback, or 2-box, vehicle may be treated as an SUV and a 3-box vehicle may be deemed a hatchback or a sedan.

A vehicle is considered an SUV in India because of its all-wheel-drive capability or its body design, not by ground clearance or by 2- or 3-box platform.

One option for auto makers is to adjust one of the three critical criteria. Making the engine or the SUV smaller is difficult and expensive and cannot be done without changing the entire design and engineering of the vehicle. “We will redefine models to meet the 6.7-ins. (17-cm) ground clearance,” Goenka says in a Facebook posting.

Mahindra’s Scorpio SUV, for example, has a ground clearance of 7.1 ins. (18 cm) at the lowest point of the differential, while the rest of the vehicle’s clearance is 7.9 ins. (20 cm).

The auto maker could add a bumper skirt, mud flaps or an exhaust-pipe attachment that would bring the lowest point down to 6.6 ins. (16.8 cm).  The owner could choose to remove the attachments after the purchase.

“We are exploring if it is possible to lower the ground clearance without touching the engineering of the vehicle,” another Mahindra executive says.