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- 1 Mar 2013
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What Increased Taxes Mean for Luxury Consumption in India


Under Finance Minister Chidambaram’s budget, basic customs duty on luxury cars & yachts will rise

India’s Finance Minister has proposed increased customs duty on luxury cars and yachts, and applied a 10% surcharge on income tax for people earning more than 10 million rupees

India has unveiled higher-than-expected spending for fiscal 2013/14, under the leadership of Finance Minister P. Chidambaram, who is cutting subsidies and raising taxes on luxury goods to pare the widest fiscal deficit in major emerging nations (Bloomberg).

In a budget aimed at reviving growth amid the country’s worst slowdown in a decade, Chidambaram announced significant spending increases on rural development, health and education, as he introduced higher taxes on wealth and the import of luxury goods.

People earning more than 10 million rupees ($185,000) a year will have to pay an extra 10 percent surcharge for one year, Chidambaram said in his speech in Parliament (Bloomberg). The move is set to affect 42,800 people, including Mukesh Ambani, India’s richest man.

 People earning more than 10 million rupees p.a. will have to pay an extra 10% surcharge for one year 

“When I need to raise resources, who can I go to except those who are relatively well placed in society?,” Chidambaram asked in his speech. “I am confident that when I ask the relatively prosperous to bear a small burden for one year, just one year, they will do so cheerfully.”

The effective rise in the tax rate for higher earners will be from 30 percent to 33 percent and will only impact taxable income, said Rahul Garg, executive director, PricewaterhouseCoopers LLP. Rana Kapoor, founder and managing director of Yes Bank Ltd. described the surcharge as “negligible.” (Bloomberg)

Under Chidambaram’s budget, basic customs duty on luxury cars and yachts will rise from 75% to 100%. Import duty on motorcycles above 800cc will go up from 60% to 75% (Livemint).

 Under Chidambaram’s budget, basic customs duty on luxury cars & yachts will rise from 75% to 100% 

Duty on Sports Utility Vehicles (SUVs) – one of the only sources of growth in a sombre auto market – will be raised from 27% to 30%, exempting those used for commercial purposes (Reuters). Automakers have already announced intentions to pass on such tax increases to buyers, which is in turn may threaten already slowed growth.

Combined, the increase in personal income tax and raised duties on luxury goods does not bode well for domestic luxury consumption in India. “The most important challenge is to convince Indians to buy European brands in India, despite frequent overseas travel” explains Gautam Vazirani.

Though this generally pertains to the purchase of soft luxury goods, which can be found overseas at much lower prices, it is not unrealistic to expect that the two-fold increase in taxes could stave off purchases of luxury cars and superyachts in the coming year.

 The increase in personal income tax & raised duties on luxury goods does not bode well for domestic luxury consumption in India 

Complicated and forever changing foreign direct investment legislation has hindered the launch of directly controlled stores by luxury brands, despite a growing appetite for luxury from wealthy Indian consumers. Despite compelling affluence statistics and growth forecasts for local wealth, the luxury market faces some steep challenges in 2013.

But comments by Minister Chidambaram during the FY2014 budget address could signal improvements in India’s attitude towards foreign investment. In his budget speech to parliament, Minister Chidambaram made the comment that India “does not have a choice between welcoming and spurning foreign investment. Foreign investment is an imperative.”

“Doing business in India must be seen as easy, friendly and mutually beneficial,” he added (AFP). Though Chidambaram was speaking specifically about the foreign investment needed to overhaul India’s dilapidated ports, roads and other infrastructure, perhaps it could lead to more lax attitudes towards FDI in retail.

On a very basic level, allowing Western luxury brands to open directly controlled stores in India would bring further employment to the Indian job market, stimulation to the local economy, investment in retail infrastructure, and for the government, increased sales tax revenues.

Though unlikely to fix fiscal deficit in its own right, the luxury market has continued to outperform the global economy, and perhaps it is time to encourage Indian consumers to invest in such products on their own turf.

To further investigate India’s luxury market on Luxury Society, we invite your to explore the related materials as follows:

- A New Wave of Opportunity for Luxury Brands in India?
- In Conversation with Deepa Harris, Taj Hotels & Resorts
- Luxury Opportunities Abound in India, But How To Manage Challenges?