Thursday, August 10, 2017

CEO Ronald Folger reasons Taxation for Mercedes cars being so expensive

Mercedes-Benz India Pvt. Ltd’s managing director (MD) and chief executive officer (CEO) Roland Folger is upset by a proposed policy change in India that seeks to increase the cess on luxury cars to 25% from 15%. That is over and above the maxim goods and services tax (GST) of 28% that luxury cars already attract. The policy change has put Folger in a spot; he was lobbying hard to get more models to India and make them locally in order to expand the market. He is concerned that his global colleagues may put investment plans and the introduction of new models in India on the back burner after the latest tax change. Edited excerpts from an interview:

For luxury car firms like yours, does the fact that you are seen as pro-rich make it difficult to do business in India?

I would not say we are pro-rich because we have been able to bring our vehicle offerings to the upper-middle segment of income levels also. And let us not forget we are only that expensive because of taxation. If you look at Germany, where we don’t have that many taxes, we have 23% of the overall market share of all cars sold. So, naturally you can make any kind of product “out there” in the market place by taxing it accordingly. That’s why we find this whole discussion so negative—that on top of 28% GST, there needs to be a cess for luxury goods. There is no logic to that because even at 28% the taxes that are paid on our vehicles are six to eight times as high as they are on entry segment products.

We have tried to explain to the government that if you could treat us at 28% taxation and leave the cess out, we could double the volume of the luxury segment in a foreseeable time-frame and we could come to the same level as we are in other countries. If we double our volume, you do not need a calculator to understand that we will be paying more taxes overall, normally speaking. Actually, you just add taxes and taxes and taxes and believe that this is the solution to the problem. I believe that is a rather naive aspect that you would like to take.

How does one define luxury? Can you cite an example?

Anything that would be harder to get or of a more precious value, would be short in supply, you could, in a general sense, term them luxury. Anything that is not a necessity to lead a normal life, you could hypothetically term luxury. And in that respect, cars 30 years ago, generally speaking, would have been a luxury...

...If Apple and other smartphones, made in India, have similar utilities and yet Apple is considered to be luxury then why does it not attract luxury tax?

You have not been able to grow the market...

The problem is due to the taxation that we have and basically no changes; whenever there was a small little scope of a volume growth, somebody came up with a bright idea and killed the segment again. It started in 2015 and 2016 December, we will not forget that date...with funny issues like diesel bans, demonetisation, and then you had the GST announcement, and that was positive for five seconds and then it’s going down again. How can you expect that segment to grow? There were other players who wanted to enter the market but you basically pulled the rug from under them. How do you explain it to your headquarters why suddenly in India there is a complete turnaround again and exactly for what—because we cannot even explain what is the rationale behind that decision. When somebody came up with these GST rates, I don’t for a second understand why somebody can be surprised that SUVs (sport utility vehicles) or luxury goods have become less expensive. I don’t get that. It was communicated for weeks —and then suddenly a turnaround. Not logical. Not easy to understand.

Were there some planned investments coming India’s way?

That has to be put on the back burner. We had communicated very high hopes for the second half of the year, helping us to overcompensate (for the) rather lacklustre development in the first half of the year. This will not happen to such a degree. Give us sometime until we see the new impact of GST on our prices and then we will do the volume expectations; but I am not so positive anymore, let me put it this way.

Amrit Raj - Mint
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