Two-wheeler makers hold out for GST rate cut, stocks of most firms rally

Companies are optimistic that if the proposal does get accepted by the GST Council, it will certainly push demand ahead of the festive season and add heft to the recovery underway

The government’s assurance to the auto industry on reduction in goods and services tax (GST) on two-wheelers brought some cheer to manufacturers and investors.

Companies are optimistic that if the proposal does get accepted by the GST Council, it will certainly push demand ahead of the festive season and give a fillip to the sector’s recovery.

Two-wheeler sales at most firms have been rising month-on-month since June.

On Wednesday, Finance Minister Nirmala Sitharaman said the GST Council will look into the auto industry’s demand for lowering the tax rate on two-wheelers, which are now taxed at the highest slab of 28 per cent. “Since two-wheelers are neither a luxury nor a sin product, they merit a rate revision. Consequently, this will be taken up with the GST Council,” said Sitharaman.

Executives at two-wheeler manufacturers welcomed the move, adding that if the rates are reduced to 18 per cent, it will boost sales in a big way. It will also bode well not only for two-wheeler sales, but also the economy and help in job creation.

The manufacturers will be passing on the benefit to buyers in entirety, they said. A 10-per cent reduction will translate into a price reduction of Rs 8,000-10,000.  

However, they added that it will help if the rate cut takes effect sooner rather than later, as any delay will cause a lot of uncertainty among buyers, dealers, and manufacturers as buyers tend to postpone purchase.  

“We are just recovering from the Covid-19 impact and on the threshold of recovery. Sales are being driven by pent-up demand and the need for personal transportation. If there is any shadow of doubt over the GST cut, the whole momentum may get lost,” said Rakesh Sharma, executive director, Bajaj Auto. More than anything else, the industry needs certainty, he added.  

Sudarshan Venu, joint managing director of TVS Motor, echoed Sharma’s views. “We look forward to it soon so that the certainty and clarity are there for customers and the entire supply chain. Vinod K Dasari, chief executive officer (CEO), Royal Enfield, also said, “The government should announce it at the earliest” and the cut should take effect across the entire range of made in India motorcycles.

Two-wheeler sales (wholesale) fell 15 per cent year-on-year in July 2020. In contrast, the decline in retail sales was much sharper at 37 per cent.

An ICICI Direct analyst said lowering of tax on final product without a corresponding reduction in components used to manufacture it would not really benefit end-consumers. If the change is made applicable to the entire two-wheeler value chain, there would be a reduction in final prices by 8 per cent, he added.

However, the benefit may not be extended to premium motorcycles (like 150 cc) and prices for those products would remain unchanged.