GURGAON-BASED Priyanka Singh replaced her Hyundai Verna with Tata Harrier last year. The 31-year-old feels that the SUV (sports utility vehicle) is more comfortable and value for money. Buyers such as Singh migrating from sedans and hatchbacks to SUVs are leading a paradigm shift in India's automobile industry, the third-largest in the world by number of cars sold. They have brought the market to a point where SUVs now account for 49% market share by volume. In line with global trends, this number is expected to reach above 60% in two-three years. SUVs are a subset of utility vehicles (UVs), which also include multi-purpose vehicles or MPVs. SUVs are designed for tough terrain while MPVs are family vehicles designed for comfort and accommodating more people. "Passenger vehicle sales are being driven primarily by UVs whose share reached close to 60% in April-September 2023 as compared with 51% in corresponding period of previous year," says Rajesh Menon, director general, SIAM. SUVs are driving the trend.

"There is a changing consumer preference for UVs, especially SUVs, by aspirational Indians. Manufacturers have also been offering multiple models of compact SUVs at affordable prices, which is encouraging people to buy more aspirational vehicles," he adds. Market share of SUVs in India increased from 16% in 2015 to 49% in 2023. In contrast, market share of sedans dipped from 24% to 13% and that of hatchbacks from 41% to 29%.

What Is An SUV?

While car makers keep experimenting with new technologically advanced launches, the definition of what is an SUV continues to be unclear. "There is no specific definition of SUV globally. As per the UNECE World Forum for Harmonization of Vehicle Regulations, a worldwide forum for establishing regulatory instruments and provisions concerning motor vehicles, there is no specified definition of SUV in the UN agreements, adopted in 1958, 1997 and 1998," says Menon of SIAM.

Earlier, SUVs were viewed as offroad vehicles such as Thar. Now, that has evolved. While some consumers prefer brawny full-size SUVs such as Tata Safari, others are fine with much smaller Hyundai Venue and Maruti Grand Vitara. "SUV is a car classification which combines elements of on-road passenger cars with features from off-road vehicles, such as four-wheel drive, higher ground clearance, etc. SUVs are typically larger and heavier than passenger cars, have a rugged design with features such as skid plates, roof rails, etc., and offer more cargo space and towing capacity," says Rohan Kanwar Gupta, vice president & sector head, Corporate Ratings, ICRA.

To be fair, Centre has a definition for the purpose of taxation. Goods And Services Tax (GST) Council has laid down three parameters for any vehicle to be defined as an SUV--engine capacity exceeding 1,500cc, length of more than 4,000 mm and ground clearance of 170 mm and above. These vehicles attract 28% GST and 22% compensation cess.

However, automakers don't strictly follow the GST Council definition in branding their passenger vehicles. For example, Maruti Suzuki's Brezza, offered as an SUV, has length of 3,995 mm and engine capacity of 1,462cc for petrol and CNG variants. Ground clearance, however, is 198 mm. Its Fronx has a length of 3,995 mm and engine capacity of 1,197cc and 998cc for petrol and 1,197cc for CNG. Ground clearance is 190 mm.

Tata Nexon, one of Tata Motors' largest selling models, is 3,995 mm long with engine capacity of 1,497cc for diesel and 1,199cc for petrol variant. Ground clearance is 208 mm. Similarly, 3,995 mm-long Hyundai Venue offers engine capacity of 1,493cc for diesel variant and 1,197cc and 998cc for petrol variant. The five-seater, however, has ground clearance of 195 mm. Automakers fall short on GST Council parameters for a number of models. 

SUVs Abroad

In the West, there is even more ambiguity. Unlike India, where government has issued guidelines for taxation, the West has the concept of pick-up trucks and cars. "In U.S., the pick-up truck is a major part of the automobile industry. They are not considered cars but light trucks. A number of SUV-like vehicles fall under light truck rather than car category," says Anurag Singh, MD, Primus Partners, a research firm.

"For personal vehicles, we have two important taxes—one is GST and cess and second is registration and road tax. The way India has defined which vehicle will be taxed how much depends on the length of the vehicle and its engine capacity. Over and above that, ground clearance parameter has been added for SUVs," says Singh.

According to ICRA's Gupta, apart from the basic criteria of ground clearance, engine capacity and length, there is no specific definition of SUV in India. "The taxation of SUVs and other smaller cars in India is primarily governed by the GST system. In addition to GST, SUVs are also subject to a compensation cess, taking the overall taxation to as high as 50%," says Gupta.

Tax Tangle

With taxation being a major criterion for categorising passenger vehicles, SUV is the most heavily taxed category. In India, GST of 29% (28% GST +1% cess) is levied on sub-four-metre vehicles with less than 1.2 litre petrol engine. Sub-four-metre vehicles with less than 1.5 litre diesel engine attract 31% GST (28% GST+3% cess). Sub-four-metre vehicles with more than 1.2 litre petrol engine or more than 1.5 litre diesel engine attract 43% GST (28% GST +15% cess). For cars longer than four metres, GST rate is either 45% (28% GST and 17% cess) or 48% (28% GST and 20% cess). SUVs longer than four metres attract 50% (28% GST+22% cess).

The 2% difference in cess between sedan and SUV is not significant, says Singh. "Auto manufacturers market their products in a way they find attractive. So, the company can categorise a vehicle under any category depending on how it wants to market it. The policy has become clear that what you call the vehicle is not important. What it is (whether you call it SUV or sedan) is more important," says Singh.

Though GST accounts for a bulk of the taxation, government also levies vehicle registration tax and road tax on passenger vehicles. Vehicle registration tax is charged when a vehicle is first registered within a state. The tax is a state subject and differs from state to state.

Maruti Suzuki, India's largest automobile maker, says total tax of more than 50% makes the cost of buying a car very high. "All passenger vehicles, except electric, are taxed at a high GST rate of 28% with additional compensation cess ranging from 1% to 22%. Over this, there is a state road tax and a few other charges which take the total tax to above 50%," says Rahul Bharti, executive director, Corporate Affairs & Chief Investor Relations Officer, Maruti Suzuki.

In India, SUVs attract a total tax burden of 71% as opposed to just 21% in Germany and 8.8% in U.S., according to a report by Primus Partners. "India's substantial automobile taxation serves as both a revenue source and a means to control vehicle proliferation on congested roads, indirectly aiding environmental preservation," says the report. ICRA's Gupta says a major reason for high taxation is the nature of the Indian economy. "We need to generate huge taxation income," says Gupta.

When compared with India, taxation on personal vehicles in U.S. depends upon sales tax and city-specific tax, says Singh. "Each state has a different rate. However, the rates are very low, between 5% and 9%. There is also a vehicle registration tax. In U.S., the overall tax rate is 10 times lower than that in India. For example, a ₹1 lakh car attracts a tax of ₹71,000 in India and ₹8,000 in U.S.," says Singh.

However, analysts say a major positive of the Indian tax regime is upfront payment of road tax for 15 years. Unlike India, Germany levies this tax annually, based on two-three parameters. The small SUV segment accounts for 29% market share in the country. In Germany, the motor vehicle tax is determined by engine capacity, measured in cubic centimetres and litres, while vehicle registration tax depends on factors such as engine size, fuel type and CO2 emissions.

Similarly, in France, the tax is based on CO2 emissions and engine power. In general, all automobile commercial transactions are subject to VAT depending on their category, rate and taxation base. Passenger cars are taxed at 20% on pre-tax price. Notably, Singapore has a far stricter tax regime than India to discourage car ownership and increase use of public transport, says Singh.

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