Auto industry may have to wait longer for GST cut on cars from 28% to 18%

Will be a political call now; state finance ministers to decide on September 20

The auto industry may be desperate for a cut in the goods and services tax (GST) on cars from 28 to 18 per cent, but the bleak revenue position has prompted the GST fitment committee to hold back from approving such a reduction. 

“With the revenue situation quite grim, one cannot recommend a rate cut on autos at this stage, which is one of the highest revenue contributors. In fact, the panel has not made any recommendation but only placed on record the revenue loss it will entail,” said a state government official and committee member.  

The fitment committee comprises state and central officers who discuss various representations from industries and states for rate reduction. It puts its recommendations to the GST Council for a final decision. When it met on Friday, the committee had to respond to the cri de cœur (appeal) from the auto sector for the GST rate on cars to be cut to 18 per cent to help the industry recover from the current slowdown.

The fitment committee said the potential loss of revenue from such a cut would be around Rs 50,000 crore annually. Of this figure, Rs 22,000 crore is for auto parts alone. The total revenue from the auto sector comes to about Rs 3 trillion annually.

The auto sector is facing the worst slump in 20 years, with passenger vehicle sales plummeting by almost 31 per cent in July. The sector faces the highest GST rate of 28 per cent and, in addition, attracts a cess, as a car is considered a luxury item.  Last week, Minister of Road Transport and Highways Nitin Gadkari tried to ally the industry’s concerns when he told the annual convention of the Society of Indian Automobile Manufacturers that he was talking to the finance minister about a cut.

Minister of State for Finance, Anurag Thakur, urged the car industry to reach out to individual state governments as the GST Council takes a decision unanimously. Kerala has opposed a rate reduction, suggesting that removing the cess might be a better way of helping the industry. “There should be no tinkering of rates for the auto sector. If the Centre wants to still support the sector, removing the cess component may be considered. As for compensating states, if the Centre falls short, it may go for borrowing,” Kerala Finance Minister Thomas Isaac told Business Standard. 

Isaac also tweeted: “If the Centre is keen on reviving auto demand, ensure liberal credit with interest subvention for rest of the year. Let the governments make advance purchases of autos as in 2010. Stop the knee-jerk reductions in GST rates.”

Subdued revenue collection in GST poses a challenge, given the growth target of 16 per cent for central GST (CGST) in 2019-20 (FY20). The CGST collection target was revised downwards to Rs 5.26 trillion in the final Budget for the fiscal year, from the Rs 6.1 trillion estimated in the Interim Budget, following a 9 per cent shortfall in collection in the previous year.  

Collections failed to touch Rs 1 trillion in August, indicating a continued economic slowdown, which was also reflected in gross domestic product growth plummeting to a 25-quarter low of 5 per cent in the first quarter of FY20. The shortfall in CGST for 2018-19 stood at Rs 50,000 crore — as much as the projected revenue loss on account of a cut in the rate for the auto sector. About 34 items classified as luxury goods attract a 28 per cent GST rate. About 60 per cent of the revenue comes from items in the 18 per cent rate slab; 13 per cent from items in the 12 per cent slab; 22 per cent from items under 28 per cent; and the rest of the revenue comes from the 5, 3, and 1 per cent slabs.

“The growth in GST revenue collections over the past few months has been tepid and this, coupled with the fact that Centre has to compensate the states (assuming 14 per cent annual growth), means any decision on rate cuts would obviously not be easy for the government,” said Pratik Jain, partner, PwC India. 

He added that rate cuts usually lead to more consumption and consequently the revenue loss may not be that high in the final analysis. He said that a compromise might be to consider a rate cut only for select categories such as bikes and smaller petrol vehicles, which may have a bigger impact on consumption. Cutting rates on hybrid vehicles may be easier than other categories, as it may have limited impact in terms of revenue if the rate is reduced only by way of removing the cess component. India currently has only a limited number of hybrid car models such as Toyota’s Camry and Prius, the Mahindra Scorpio Intelli Hybrid, and the Honda Accord.

According to an internal Toyota study, Camry sales fell by 75 per cent after the hike in tax incidence post-GST implementation, causing a revenue loss to the exchequer. 

In the pre-GST period between January 2016 and June 2017, 1,916 units of Camry were sold, against just 482 in the July 2017-December 2018 period, owing to an increase in the ex-showroom price in Delhi from Rs 32 lakh to Rs 37 lakh. The tax paid to the Centre fell from Rs 3.5 crore to Rs 2.8 crore per month.
 

The lack of a clear recommendation from the fitment committee means the ball is back in the GST Council’s court for when it meets on September 20 in Goa.