One of the most popular Indian cricketers is said to own 70 bikes and at least a dozen luxury cars. Data from the Federation of Automobiles Dealers Association indicates that around 35,000 luxury cars, costing at least Rs 50 lakhs each, were sold in FY24, including BMWs, Mercedes, and Audis. There were around a little less than 1000 Porsches sold in the same year. At an even higher price level, there were over 100 Lamborghinis sold, while the count for Rolls Royce was about 60. Now a Porsche can start at around Rs 1 crore, while a Lamborghini is close to Rs 3 crore. A Rolls Royce can cost upwards of Rs 7 crore.
There was also news of some industrialists buying a series of apartments in Mumbai’s prime locality at over Rs 200 crore. It is not certain if the numbers are true, but there have been similar numbers spoken of celebrities buying homes, which can go up to Rs 100 crore each. Cricketers in categories A and C have done well for the country and purchased multiple homes, which could be costing upwards of Rs 30 crore each in places like Mumbai or Delhi.
For each of these purchases, there is an official trail of the income earned or loan taken with a history of tax returns. Therefore, there can be no issue in terms of capacity to pay for such indulgences. In fact, from a capitalist standpoint, it can be argued that these are the fruits of hard work and business, where money is earned and invested in these luxuries. All such purchases add to the GDP of the country and, hence, are useful. In a way, when the general masses are unable to spend money due to inflation and consumption is down, the premium products have done well due to this class.
Now, the idea for the government should be whether or not to impose a luxury tax on such purchases. There have been talks of a wealth tax being imposed, which has arguments on both sides. Anyone who has accumulated wealth has paid all the taxes that are due, which can be a stamp duty on property or GST on vehicles or capital gains tax on equity gains. Therefore, taxing the same for retaining wealth would not be fair. However, there is scope to revisit the tax rates at the time of purchase.
For example, the stamp duty in Maharashtra is fixed at 6%, which does not take into account whether the house costs Rs 1 crore or Rs 100 crore. Here it is assumed that as it is an ad valorem tax, which is on value, it is equitable as higher value homes pay higher duties. But logically, if a person is buying a home for Rs 100 crore, imposing a luxury tax or cess of 20% would be very much in order. The state government can earn substantial revenue as it falls in its jurisdiction.
In the case of automobiles, the GST is 28% at the higher end with a composition cess of 22%, which adds to 50%. But this has not been a deterrent to such purchases, as they are often style or position statements. Based on the sales of cars mentioned above in the starting range of Rs 50 lakhs, the total cost would be around Rs 17,500 crore at the lower end (as often those who can afford such vehicles would purchase higher variants, which can go up to double the price). An additional 10% luxury tax or cess can add Rs 1750 crore as revenue at the lowest end. In fact, in the past, when such luxury cars were imported, the tariff was 100%, which did not really push demand down, given that they were status symbols. Against this background, anything less than 100% is still something that sounds reasonable and will not act as a deterrent. Hence, if the money spent on 60 Rolls Royces amounted to, at least, Rs 420 crore in FY24, imposing another 50% luxury GST over the existing 50% could have garnered another Rs 210 crore.
There is reason for the government to revisit the tax structures for luxury goods, where lines can be drawn on what constitutes the same. A house over Rs 20 crore could get classified as one in a metro city, while a vehicle above Rs 50 lakhs would fall in this category. The same can be extended to even hotel stays, where there is accommodation in the higher price bands. At present, it is capped at 28%. But a room rate of say Rs 50,000 and above can be levied to garner more revenue.
Today, there is skewness when it comes to the distribution of income. While it is true that even those at the bottom levels are witnessing improvements in their standards of living, the growth in wealth at the higher level has been more pronounced. Weddings could involve a large expenditure outlay, which can be taxed, as this could be in various forms such as clothing, jewellery, food and beverages, resorts, decorations, travel, and so on. There is value added as all expenses add to consumer spending, which is based on income earned on which all taxes have been paid. There is, hence, a justification in taxing what can be called ostentatious consumption through a luxury tax or cess. This would help in garnering revenue for the government. In turn, such revenue can be used as part of the resources that are deployed for direct cash transfers to the poor through monthly payouts to women or any other vulnerable section of society.
Intuitively, it can be seen that a lot of the money that is spent on these luxuries is through the sale of securities acquired through stock options or ownership of the same or by leveraging brand value, which holds for sportspeople or film stars. Hence, these incomes may not strictly come from the core profession as salary for those in the corporate world or games for sportspersons. This tax could also serve at the limit to encourage the elites to save money once demand is satiated. Hence, it would be helpful any which way, as such demand is agnostic to price levels.
Chief Economist, Bank of Baroda and author of: Corporate Quirks: The darker side of the sun. Views are personal.
