Car sales need more than just a tax reform push

The debate around India’s automobile taxes reignited after a Toyota executive suggested these were blocking growth. Many have blamed the 28% GST rate, compensation cess which lead to a high cost of car ownership. But, there are other factors involved too. Mint explores

What costs are linked to a car ownership?

Car ownership costs fall in two categories—first is the cost of purchasing a car and the second would depend on the costs associated with running the vehicle in the form of fuel, wear and tear, regular maintenance etc. In context of the first category, several taxes are levied on vehicle purchase, such as goods and services tax of 28%, vehicle registration tax, road tax, besides spending on an insurance cover, which is key to safeguard one’s investment in a vehicle. Then there are expenses incurred on fuel, where we have excise and VAT which are kept outside GST. These taxes raise ownership costs.

Aren’t cars, petroleum items complementary?

In economics, complementary goods are goods that display a negative cross-price elasticity of demand. That is, if price of petrol falls, demand for cars would increase as the cost of running the vehicle reduces. Petroleum items and cars are a classic example of complementary goods. Low crude prices over the last few months enabled governments to increase taxes on petroleum products to raise revenue without increasing the retail prices of fuel. However, with the recent increase in crude oil prices, retail prices have marginally increased from pre-covid levels as governments are yet to cut these taxes.

Sharp decline

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Sharp decline

What are the other major costs associated with cars?

High fuel taxes can be considered as an alternative to the carbon tax levied in several countries. Apart from these, there are compensation cess of 1-22% depending on the car length, engine type, etc, registration charges that vary from state to state, local taxes levied by the municipal authorities, insurance charges and a nominal charge for the fast tag.

Are these costs behind muted auto demand?

It is intuitive to expect so. Indeed, a lower cost of ownership would encourage others to purchase private vehicles. However, globally, automobile sales for internal combustion-based vehicles have been muted due to several factors. There has been a shift towards electric vehicles in many nations and simultaneously, the rise of ride hailing services has also emerged as a fresh challenge. Lower costs of ownership could be insufficient in mitigating the impact of these trends for the automobile industry.

Will lower tax rates stimulate demand?

It is natural to expect lower tax rates in the form of a lower rate of GST or compensation cess to stimulate demand. However, a more important catalyst for the industry could be the introduction of the scrappage policy which phases out old vehicles. While a comprehensive GST reform and compensation cesses are needed, it can’t be limited to just that. Robust income growth, scrappage policy combined with low interest rates would be key for demand growth.

Karan Bhasin is a New Delhi-based policy researcher.

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