SUV makers hit with Rs 10,000 cr tax notices: Row over GST cess explained

The GST authorities have sent notices to most automakers for the alleged non-payment of the SUV sales cess between the financial years 2018 and 2022

The central government has issued tax notices amounting to Rs 10,000 crore to automobile manufacturers for 'failing to pay the compensation cess' under the Goods and Services Tax (GST) on utility vehicles, according to media reports.

The taxes relate to utility vehicles sold before 2022, including popular models like Mahindra’s Thar and Scorpio, Tata Motors’ Safari and Harrier, Hyundai’s Creta, and Maruti’s Brezza.

Dispute over SUV cess

The GST authorities have sent notices to most automakers for the alleged non-payment of the SUV sales cess between financial years 2018 and 2022. In response, automakers filed an appeal in August with the GST Commissionerate, citing confusion over how the cess laws were interpreted during the period.

The primary issue revolved around the definition of SUVs, specifically whether ground clearance should be measured when the vehicle was “laden” or “unladen”. Laden ground clearance is the distance between the lowest part of a vehicle's body or chassis and the road when the vehicle is carrying passengers and cargo. It wasn't until July 2023 that clarity on this matter was provided, according to the manufacturers.

Despite these concerns, the government has remained firm, stating that utility vehicles are subject to a 28 per cent GST, along with a 22 per cent compensation cess.

Industry response

In July 2022, the GST Council clarified that the cess would apply to all utility vehicles. Later, in December 2022, it further specified that the tax and cess would be applicable to all SUVs with an engine capacity exceeding 1,500 cc, a length greater than 4 metres, and a ground clearance of at least 170 mm.

The retrospective application of these clarifications could pose significant challenges for manufacturers who are unable to recover the additional indirect taxes from consumers.

Meanwhile, the Society of Indian Automobile Manufacturers (SIAM) has requested intervention from the Ministry of Finance on this matter. Earlier, Finance Minister Nirmala Sitharaman defended the imposition of the cess, stating that the law was only clarified, not changed, in 2022.

At present, SUVs with engine capacities above 1,500 cc, lengths greater than 4,000 mm, and ground clearance above 170 mm attract a GST rate of 28 per cent, along with a 22 per cent compensation cess.