By on March 3, 2013

The whole world is betting big on India and China. I don’t have much idea about China, but India definitely needs to move its game if it wants to become a biggie in the automobile sector. Scams, scams and some more scams is what India is becoming more famous for, resulting in a huge deficit for the government. This in turn results in hue and cry by the ministers, resulting in increased taxation.

Just recently the 2013-14 budget was announced. I have mentioned the small car definition before, but I shall re-iterate it once again for the benefit of all. Any car having a length of less than 4-meters, powered by engines less than 1.2-liter (gasoline) / 1.5-liter (diesel) in cubic capacity is considered a small car in India. These cars are subjected to an excise duty of 12 percent. Any car above 4-meters in length but falling in the above engine capacities is charged with 24 percent excise duty. Then there are those cars which are neither 4-meters in length nor falling in the above engine capacities: 27 percent excise duty.

Many car makers have tried to play around the rules and trimmed bumpers to fit in the under 4-meter category. The Ford EcoSport is one such vehicle. It is a small car according to government definitions and will be subjected to lesser duties. Ford was delaying the EcoSport launch hoping the Government would reduce duty by 2 percent to 10 percent on small cars. This was the prevalent duty a couple of years back.

To create more revenue, the Indian Government created a new tax, casually referred to as the SUV tax (not applicable on taxis). According to the new ruling, SUVs will be charged 30 percent excise duty, instead of 27 percent. This news came as a shock to manufacturers. More so, because while all other segments were showing decline, the SUV segment was showing a good growth and was looking promising.

The finance minister claims that SUVs occupy more space on the roads and hence should be taxed more. Wait a second, most of the popular SUVs are not even as long as the Honda Accord. But if he meant SUVs occupy vertical space, then how is that a bother?

Don’t be shocked, because the worst is yet to come. So what is an SUV? The government has defined an SUV as a vehicle which is more than 4-metres in length, having an engine capacity of more than 1.5-litres (gasoline or diesel) and a ground clearance of 170 mm or more. This has led to many sedans being classified as an SUV, being subjected to higher duty. The reason why sedans have such ground clearance is, so they don’t scrape their underbody. Indian roads are in horrible condition and one can’t really drive a car with low ground clearance without gradually damaging the underbody over time. I know I had a Honda City (Jazz/Fit sedan) and the rubber under the front bumper kept falling every two months!!

In other bad news for the Indian auto industry, the Government has hiked excise duty on imported cars from 75 percent to 100 percent. The new Range Rover costs over $4,00,000 and is going to get even costlier now. The Porsche range is now going to be dearer by $50,000 to $2,00,000 (remember I said costlier, add the base price and you know how expensive it is to buy a Porsche in India), Ouch! Even the duty on imported motorcycles has been hiked from 60 percent to 75 percent. If you hear news about the Indian car market being wobbly, now you know why.

Faisal Ali Khan is the editor of, a website covering the automobile industry of India.

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29 Comments on “How The Indian Government Screws Its Automobile Industry...”

  • avatar

    So when is this joy coming to America?

  • avatar

    The car manufacturers should just sell cars with short springs to avoid the SUV excise tax and then offer to put in taller springs to raise the ride height as a discounted dealer-installed upgrade at the first oil change service. The extra labour might be cheaper than the excise duty. Particularly if it’s a simple suspension design without any alignment bolts built into the strut assembly.

  • avatar

    I don’t see how this article links the increased taxation to the initial claim that India is becoming famous for scams. Or how increased taxation is going to lead to a deficit for the government. Increased tax revenue means more funds, not more debt. Unless people stop buying cars altogether.

    Also, I can think of several reasons why India might want to slow down the car industry – one of which the author mentioned himself. An inadequate road network. There could also be issues around communities not being designed to accommodate vehicle parking. Until those things are sorted out (which takes money – thus the taxes), it could be a good idea to curb car adoption.

    Even China limits car adoption through their license plate auction system. At least in India, you can get a car if you pay up. And you don’t need to bribe someone to get a plate.

    China is also very pro-industry, to the severe detriment of the environment. Not necessarily an example that India should follow.

    • 0 avatar

      Increased tax will lead to a negative sentiment, resulting in decrease in demand. its quite simple, as prices go up, demand comes down and vice versa.

      Now the point of scams come from the fact that, the deficit has been caused by scams. Thus the Government is trying to boost revenue and recover the money lost in scam by taxing people higher.

    • 0 avatar

      If you tax something, you get less of it. If you subsidize it, you get more of it. Them’s the rules. The increased taxes end up being counterproductive and generate less revenue than before. Besides people jiggering things to avoid taxes, the taxes people do pay are funds not available for economic development in the private sector, so there is less economic activity and less tax revenue in general.

      The “scams” come in to avoid arbitrary tax rules.

      As for the environment, China may be dirty now but as they get richer, they’ll clean things up. That’s how it’s worked everywhere else and that’s how it will work in India. Why should people in the developing world not enjoy the benefits of living in the 21st century? Now I happen to fear that because of the one party system in China, with many businesses state owned, that it will be a bit slower in responding to environmental issues than democracies.

      A while back I took some courses in haz waste mgmt and in one of the public policy classes, it was pointed out that even before the Clean Air and Clean Water acts and the subsequent alphabet soup of regulation like RCRA and SARA, in the U.S. property owners could sue for damage to their property by a polluter. When the government is the polluter and the property owner who is going to challenge? See the book Ecocide in the USSR.

  • avatar
    Carl Kolchak

    Couldn’t Tata build rovers (and Jaguars) in India for Indian customers only? They do own the company and are building cars there already. I do not know how big the market is for these cars in India. Wouldn’t it make sense if you can drastically undercut your competition prices by limiting the taxes on your vehicle by some huge amount?

    • 0 avatar

      Carl, volumes are too low to justify local production, heck they don’t even do local assembly on the Range Rover line-up yet. Their own locally assemble two cars – the Freelander and XF.

      Besides, the high use of aluminium makes local manufacturing difficult.

      • 0 avatar

        The Defender sounds like the ideal Land-Rover for India: massive over engineered chassis, modular bodywork that can be customised or reconfigured from pick up to station wagon with two 1/2″ spanners, big long travel suspension. And soon the EU will not allow it to be sold here any more so it’ll be a loose end.
        Whereas the Range-Rover, like all Land-Rover’s other products but the Defender, is completely electronic dependant. Hard enough to get that stuff sorted in the UK but India?

  • avatar

    “the Government has hiked excise duty on imported cars from 75 percent to 100 percent. The new Range Rover costs over $4,00,000 and is going to get even costlier now.”

    That’s odd, considering that Range Rover is an *Indian* brand these days… oh, well, it’ll probably accelerate production being moved from the UK to India, which it would have been eventually anyway.

  • avatar

    Can we delegate Obama and Biden with all their tzars to India (and get rid of him at the same time – the perfect solution)? He fits India’s governance style perfectly well.

  • avatar

    Sadly it’s not just India that is getting ridiculous with taxes. Here in Argentina we also have to deal with this. There’s a luxury tax for cars in my country: if the price of a car, before any taxes, exceeds a certain amount, it gets charged with the luxury tax (about 10-15%, I think). If it’s a diesel car and exceeds that amount, it gets ANOTHER tax for diesel luxury cars (25% I think), in addition to the previous one.
    Before last year a car would need to cost more than 200000 pesos (before taxes) to be considered a luxury car. Last year they dropped the threshold to 150000 pesos. So now most mid-size cars and large SUVs got a 20-30% price hike due to taxes. But since we have 30% yearly inflation in Argentina, it’s only a matter of a few years before ALL cars get hit with this tax. Car makers are already concerned about this since such a price hike would reduce sales. It’s also the nail in the coffin for diesel cars, as “luxury” diesel cars are about 40% more expensive than a gasoline one (since they get the regular luxury tax plus the diesel luxury car tax).

    • 0 avatar

      Magnum, that is really sad state of affairs, is the same hit taken by bikes too?

    • 0 avatar

      Isn’t Argentina the country where president issued a decree to nationalize all money sitting in 401K accounts? US is not immune either to any kind of foolishness – Senate considered similar plan couple of years ago to confiscate all 401K accounts and instead provide Government guaranteed pensions – i.e. equalize pensions like in USSR. Well when Government overspends and people demand more and more Government handouts and services everything goes unpunished. I can imagine the similar luxury tax introduced in US when population gets dumbed down enough and country becomes one party authoritarian system like California. On the other hand people normally have basic instinct of protecting their property and money. But it only works if majority of population is a middle class and in countries like Argentina it is not the case. Increasing erosion of middle class last 4 years is a fact of life in America. During last days of Bush administration 31 million people were on food stamps and after 4 years of Obama administration this number increased to 46 millions and keeps growing.

      • 0 avatar
        Athos Nobile

        Argentina used to be kind of a middle class country before the “Corralito” and the default. I can’t recall the exact year in which the crisis exploded, but it was at the beginning of the ’00s.

        In any case, with the friends their president has what do you expect.

        If I were to tell some of the stories of how hard is to get currency (and how much money I lost when converting) and the corruption that went and goes in Venezuela, you cry.

        • 0 avatar

          Well, USA also used to be a middle class country before their national debt grew beyond sustainability levels, interest rates returned to a normal levels and US defaulted on its obligation (voice from the future). The alternative ending: After interest rates returned to the normal level US Government could not afford paying 1 trillion dollars a year on sovereign debt interest and Democrat controlled Congress and White House decided to confiscate private bank and 401K accounts (only rich could afford ones of course) by starting hyperinflation.

          For those 47% of Americans who had trouble with math at school and still live in stone age: The first years of Obama administration budget deficit skyrocketed to 10% of GDP, currently it is 6% of GDP. Sustainable level is 3% of GDP. You voted for the right guy – enjoy.

  • avatar

    Many developing economies are faced with this same situation. The government can raise revenue either through consumption taxes or income taxes. In India the income tax route is often bypassed with “black” money (i.e., under the table payments in cash), so the government relies much more on consumption taxes. As a result, luxury goods are especially hard hit by consumption taxes.

  • avatar
    Big Al from Oz

    Just the other day at work I was talking to an Indian guy. I asked him what the difference between Australia and India is. He said you don’t have corruption.

    His brother wanted to build a house in India and the town planner told him his house plans didn’t meet the local building codes. He was pointed in the direction of the town planner and told to offer some incentive to allow the plan to pass approval.

    As for the Indian tax system. Even as complex as it is it only supports beauracracy and government “sponsored” business. This keeps wealth in a few hands.

    Most complex tax systems with “left” leaning modelling has money redistribution to the lower classes. How well is the money flowing down with the current tax regime?

    But in all honesty India will gain traction and mend its ways. How many years this will take I don’t know. As the middle class slowly develops they will demand change and the rise of China will encourage change. Some people don’t realise this, but India did go to war against China in 1962. This was caused by China trying to expand its borders in the Assam state (NE India).

    India has always been the country that is almost there, but seems to stumble due to government inefficiencies. India could offer significant growth postitively impacting the globe…..if it wasn’t for their corrupted, antiquated and ill equiped system of democracy.

  • avatar

    What we read here is a high level story and not the entire ground reality, while it is true that government keeps increasing the taxes and tried to tax the rich, the bad part is that not every earning citizen of India pay their tax!!

    By and large most of the tax payers are the ones who are employed, most of the business grades and other small time players doesn’t even pay tax, they find their own way to escape from the tax net.

    If everyone pays their tax, government doesn’t needs to snap tax on fuel, imported automobiles and new cars.

    Problems lies within people and not with the government

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