GST tweak can make India export hub: Volkswagen India MD Gurpratap Boparai

German carmaker Volkswagen AG has made a pitch for removing differential taxation biased in favour of cars less than 4 metres long, which, it says, has been an obstacle to India becoming a global hub for export.

Currently, goods and services tax (including cess) on cars less 4 metres long is 29 per cent for petrol-driven ones (31 per cent for diesel) but goes up to 45-50 per cent for those over 4 metres.

Gurpratap Boparai, managing director, Volkswagen India, said: “Passenger cars below 4 metres represent roughly 7 per cent of the global market and that is also declining. The restrictions imposed by taxation based on the size of the car, which does not exist anywhere else in the world, suppress production volumes. So we are not able to address the other 93 per cent of the global market.”

Global auto companies say the differential structure was imposed after the entry and success of the Ford Ikon, in order to protect small car manufacturers.

Boparai said a global manufacturer in India would have to invest mostly in the segment below 4 metres because it constituted 70 per cent of sales here.

“It has limited export potential, but if the taxation differential goes down, India could become an export powerhouse for bigger cars. More models and new players will come.”

Even China does not have a differential taxation policy, though the market 20 years ago was dominated by small cars but has now moved towards bigger ones, he said.

Boparai pointed out in Volkswagen’s case while the Polo (below 4 metres) and the Vento (above 4 metres), which were based on the same platform and had very little cost differential, the substantial difference in their price was because of the tax structure.

Exports of passenger cars from India have been limited and the bulk of those are small cars. Indian exported 670,000 cars in 2019-20.

Volkswagen is pushing for a change through Society of Indian Automobile Manufacturers (Siam).

“Despite the dominance of certain players and many who have invested in sub-4 metre cars, Siam is open to a phased reduction, which the government can announce over, say, the next five years.”

But will the government’s revenues be hit?

Boparai said: “Here is one example. The luxury car segment accounts for less than 1.5 per cent of the volumes of passenger cars. But it represents 11 per cent share of revenues. So the revenues would be significantly higher.”

The other impediment to exports is the lack of free trade agreements (FTAs).

“We have been negotiating an FTA with the European Union (EU) for a decade if not more. And that’s not coming through. So in 2016 the EU imposed 10 per cent import duty on fully built cars from India as India wasn’t lowering duties, let alone doing away with them. This meant that when the time came for the next generation of cars to be tooled up, that was done in Eastern Europe. So Maruti took the Swift to Hungary and Hyundai took the i10 to Turkey. India lost out.”

The general lack of FTAs with countries like Brazil, which has high duties, or Mexico, where it is 10 per cent, plus the logistics cost, has made Indian exports uncompetitive.