Highway robbery

I always knew that cars were more expensive in India than in the United States. But probably 10 years back, there were few models common between the US and India. But the last few years have seen an increasing number of common models sold in India, US and Europe. So that gave me a basis for comparison of car prices between the US and India.

A quick look reveals that a car can cost anywhere from 30% more (for a Hyundai Accent) to a whooping 225% more for a Mercedes ML SUV. A little bit of further digging tells me that the price discrepancy comes from two sources – higher taxes and higher invoice prices in India.

The automobile taxes are high enough to cause tea partiers to commit suicide. Here is a brief look at the taxes levied on cars.

Excise tax –          12-16%
Central sales tax – 2%
Octroi tax –          4%
Entry tax –            12%
Sales tax (VAT) – 12.5%
RTO Reg Tax –     1%

So if a car costed $17,500 on the road, approx. $6300 would be in taxes.

Now for the second whopper. An OEM can extract a much higher consumer surplus (price) for the same car in India as he can in the US. This is even more apparent as you go higher up the class ladder.

If you look at the figures in the table, a couple of things are apparent.

  1. The on-road price of a car in India can be anywhere from $4000 more (for a Hyundai Accent – Verna in India) to $110,000 more for a Mercedes ML SUV.
  2. Even after taking into account the higher taxes, you can see that an OEM can charge more for the same car in India than in USA ( $1500 more for the Accent to $55,000 more for a Mercedes ML 350)
  3. The OEM can charge a higher cost for an SUV than for a plain-jane sedan. For e.g., a Merc E-350 actually costs three grand more than the ML 350 in the United States while in India the trend is reversed. The ML350 SUV costs a cool 33 grand more than the E-class.

Of course, the OEMs have calculated the optimum price the market can bear so as to maximize their profits.
But the bigger question is that if India charges so much more in taxes (including fuel taxes), why is infrastructure so much worse off. Any answers?

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