Mahindra Re-Engineering SUVs to Lighten Tax Burden

MUMBAI – Under fire from both the Indian government and rival auto makers, Mahindra & Mahindra is scrambling to re-engineer its SUVs to dimensions that will protect them against a potentially damaging tax increase.

The government in February increased from 27% to 30% the excise duty on SUVs that have a ground clearance of 6.7 ins. (17.0 cm) or more, measure more than 158 ins. (400 cm) in length and an engine of more than 1.5L.

Mahindra’s eight SUVs have ground clearances ranging from 6.8 ins. (17.2 cm) to 9.9 ins. (25.2 cm). While such vehicles are only a small segment of other auto makers’ portfolios, they account for 95% of Mahindra’s revenues and almost the entire range faces the new 30% tax rate.

Complicating Mahindra’s situation is the introduction of a new generation of compact vehicles, none subject to the 30% tax, by competing auto makers.

A vehicle that does not meet any one of the three criteria – length, engine or ground clearance – remains taxed at 27%. Mahindra in fact already has such a product in the Quanto compact SUV, which features an engine smaller than 1.5L and is less than 158 ins. in overall length.

But for Mahindra engineers seeking a way around the higher duty for the rest of the auto maker’s SUV range, the solution is not a simple one.

To reduce length to 158 ins., the platform must be cut and seating space squeezed. Reconfiguring an engine to 1.5L either means vehicle weight must be reduced substantially or driving dynamics must be reworked. Mahindra chose instead to work on ground clearance.

Reports, not confirmed by Mahindra, say the auto maker reduced one SUV model’s clearance to 6.3 ins. (16.0 cm) from 7.9 ins. (20.0 cm). But in doing so, the vehicle’s visual appearance is lost and its off-road capabilities are compromised.

How has Mahindra done this? Again, the word in automotive circles is that the auto maker changed its method of measuring ground clearance. The standard technique is to reflect a beam of an arc-light flash from the bottom of the vehicle toward the ground. This indicated ground clearance of 7.9 ins.

But when engineers measured the height using a foot ruler, the reading was 6.7 ins., precisely the height specified by the government. To be safe, Mahindra fitted a stone-guard plate below the engine and the sump bottom to reduce clearance to 6.3 ins.

This is an experimental effort and the authorities may challenge it. Mahindra has not clarified whether the stone guard is part of the body frame or just a removable attachment. Since it is not an engineered part of the vehicle, it may be removed by customers after purchase without affecting driving capabilities.

So at present, Mahindra is awaiting the response from the market and government regulators before repeating the procedure on its other seven SUV models.

Quite apart from the engineering and certification requirements, there is a commercial angle to Mahindra’s approach.

The Indian market’s SUVs are relatively costly at Rs1 million to Rs1.5 million ($17,000 to $25,000). Neither auto makers nor their customers would have been concerned about a 3-percentage-point tax increase that would have raised prices just Rs30,000 to Rs42,000 ($500 to $700) in 2011 or 2012, when sales of SUVs and other light trucks grew17.3% and 19.9%, respectively, according to WardsAuto data.

But during the past 15 months of declining sales and rising prices, auto makers consider this tax increase critical. That has all of them, not just Mahindra, looking for ways around any one of the three criteria of length, engine or ground clearance.