Budget 2016: 1% luxury tax to impact consumption more

NEW DELHI: Luxury sector experts have given a thumbs down to the government's budget proposal of imposing a 1% tax at source on luxury goods exceeding Rs 2 lakh and car purchases exceeding Rs 10 lakh.

"I feel that in a scenario where the consumer sentiment is already low, this could spell lower purchases in India for luxury goods and services," said Sanjay Kapoor, founder and managing director of Genesis Luxury which has a mix of joint venture and marketing and distribution arrangements with brands such as Burberry, Canali, Jimmy Choo, and Giorgio Armani.

"Psychologically the luxury consumer may feel better about shopping overseas for the same brands which in any case they perceive as cheaper overseas. We have tried to correct this perception over the years, but with such new levies it just goes against the case of shopping in India," he added.

Neelesh Hundekari, partner in the consumer and retail practice at AT Kearney and an expert in the lifestyle and luxury space stated that the tax is based on the belief that the rich can always afford to spend a little bit more, which is not an irrational belief, but will impact consumption.

"Luxury goods are anyway more expensive in India because of the high duties and this will impact luxury products other than cars more as they can always be purchased overseas and could still be cheaper than India after the import duties," said Hundekari.

An industry insider said brands looking at entering India may do a rethink as they always want to match their rates across markets. "This is not the best thing happening. As it is, new rules now require identification by pan cards for certain transactions and this seems like an additional burden," she added.

"The additional 1% tax on cars costing above Rs 10 lakh will have an adverse impact on sales of cars in these categories," said Rajat Wahi, partner and head, consumer markets, KPMG.