From Mercedes to BMW, luxury cars forced into slow lane as cess increases

Luxury carmakers clock high growth after GST led price cut in July

Luxury car sales — zooming since the roll-out of the goods and services tax (GST) in July — have hit a speed breaker now: Higher cess.

Under the GST, taxes — and consequently, prices — of luxury cars had fallen. Leading brands such as Mercedes and BMW had clocked high double-digit growth in the quarter (July-September) — also the best for some of them.

However, since September, when cess on luxury cars was raised, prices have gone up and demand down.

“Prices are back at pre-GST levels; it has affected our October sales. From November, sales are back to our earlier estimates,” said Roland Folger, managing director and chief executive officer (CEO) at Mercedes Benz, the country’s largest luxury carmaker.

The company had clocked a 41 per cent year-on-year growth in the July-September period, selling 4,698 cars. Folger did not share the growth rate in the October-December quarter, but it is nowhere close to the previous quarter’s. Companies had cut prices of luxury cars by 8-10 per cent in different states since the GST roll-out.

In September, the GST Council decided to hike cess on mid-sized cars by 2 per cent, taking the effective GST rate to 45 per cent. Cess on large cars has been hiked by 5 per cent, taking the GST rate to 48 per cent. For SUVs, cess is up 7 per cent, taking the effective GST to 50 per cent. The hike came into effect from mid-September, promoting companies to increase prices. In some states, the new prices of these cars are even marginally higher than pre-GST prices. 

“We expected the luxury car market to show a better performance this year. The GST was a very good step. The cess hike definitely disturbed the positive momentum, as there was no real measurability of the GST impact. Uncertainty in the minds of customers with regard to the GST as well as the cess hike had a negative impact on us. We see this as a flat year for our brand,” said Rahil Ansari, head of Audi India. 

This also implies the government, in spite of the cess hike, might end up getting only as much tax revenue from this segment as it did earlier, thanks to the slowdown in growth.

“By continuous taxation of the segment, the overall revenue generation is surely hurt, as the increase in prices is going to deflate the demand and affect sales. This way, it seems the contribution of the luxury car industry to the total car market will remain constricted, though ironically, in other developed economies, it is on the higher side,” said Folger. In India, luxury cars form just about a per cent of the annual three million car sales. 

Luxury carmaker BMW said changes and fluctuations on cess adversely affected growth.

“Such hasty inconsistencies in policy derail business continuity and consumer confidence,” said Vikram Pawah, president at BMW Group India. Swedish car maker Volvo Auto’s India managing director Charles Frump said the brand’s sales have slowed down after cess was imposed. 

Gurmeet Singh Anand, managing director at AMP Group, the sole dealership for Jaguar Land Rover in the National Capital Region, said his firm’s sales grew at 50 per cent during the July-September period. 

However, growth has been down to a single digit from October onwards.