GST cuts boost auto sector, dealers hope for quick cess resolution

Auto dealers expect a boost in the second half of FY25 following GST cuts on vehicles and parts, which aim to improve affordability

If one walks into a car showroom on Friday, dealers are unlikely to offer much clarity on the on-road price of any vehicle, said an office bearer of the dealers’ body.

 

“Within a week, however, we expect clarity on the issue of compensation cess that dealers have already paid while buying vehicles from original equipment manufacturers (OEMs). The impact of this cess alone is around ₹2,500-3,000 crore for dealers,” said C S Vigneshwar, president of the Federation of Automobile Dealers Associations (Fada). He added that dealers are holding an inventory of around 600,000 passenger vehicles (PVs), or about two months of stock, valued at roughly ₹72,000 crore (assuming an average selling price of ₹12 lakh). 

Fada has already reached out to the Centre and is hopeful of a resolution soon, which it believes should involve the government refunding the cess collected from dealers. Analysts said input tax credit on inventory sourced before the new GST rates came into effect can be claimed at the older, higher rate, making it easier for dealers to rebuild inventory in the coming days. 

On the positive side, immediate disruption from the new GST regime may be limited, as September 7-21 marks Pitru Paksh, a period considered inauspicious for new purchases. Once this hurdle is sorted, GST rationalisation could bring back entry-level buyers, many of whom stayed away from the market since the pandemic due to sharply rising automobile prices and low 

income growth.

 

BNP Paribas analysts estimate a “mid-teen” percentage point increase in volume growth for small cars and two-wheelers.

While small cars are the biggest beneficiaries, larger SUVs will also gain. Vehicles under 4 metres in length will now be taxed at 18 per cent, compared with the earlier 28 per cent (plus cess). Larger cars will attract 40 per cent GST, instead of the earlier effective rate of 50 per cent. 

 

The GST Council on Wednesday cut the tax rate on small cars (under four metres, with engine capacity up to 1,200 cc for petrol and 1,500 cc for diesel) to 18 per cent from 29-31 per cent earlier. Larger cars (over 4 metres, engines above 1,500 cc, and ground clearance above 170 mm) will now face 40 per cent GST, down from an effective 50 per cent (including cess). The Centre has withdrawn the compensation cess entirely. Motorcycles with engine capacity below 350 cc will also attract 18 per cent GST, compared with 28 per cent previously.

 

The move is likely to inject “renewed cheer” and “fresh momentum” into the Indian automotive sector, according to Shailesh Chandra, president of the Society of Indian Automobile Manufacturers (Siam).

 

Making vehicles more affordable, particularly in the entry-level segment, will significantly benefit first-time buyers and middle-income families, he said. Chandra added that Siam hopes the government will also notify “suitable mechanisms” for utilising compensation cess on unsold vehicles to ensure a smooth transition.

 

For two-wheelers, the cuts may encourage upgrades. “For our industry, especially, it’s a welcome move as it will make two-wheelers more accessible and also help those looking to upgrade,” said Sudarshan Venu, chairman of TVS Motor Company.

 

Mahindra & Mahindra (M&M) is expected to be the biggest beneficiary, thanks to a 10 per cent GST cut across its portfolio. Two-thirds of its portfolio will now be taxed at 40 per cent versus 50 per cent earlier (including cess), while the rest moves to 18 per cent from the earlier 28 per cent slab. Maruti Suzuki India and Hyundai Motor India will see a 7-8 per cent blended cut in GST across their portfolios, with one-third of volumes benefiting from a 3-5 per cent reduction and two-thirds enjoying cuts of around 10 per cent, according to Emkay.

 

In the two-wheeler space, where volumes are still below the FY19 peak, the rate cut offers a chance to restart growth. Hero MotoCorp is the biggest gainer, with a 10 per cent GST cut benefiting 94 per cent of its volumes, followed by TVS (10 per cent cut for 70 per cent of portfolio) and Bajaj Auto (10 per cent cut for 49 per cent). Despite a higher 40 per cent GST rate on models above 350 cc, Royal Enfield remains a major net beneficiary, as 81 per cent of its portfolio benefits while only 8 per cent is affected.

 

As such, the second half of the financial year is expected to be positive for the industry. Emkay analysts had earlier forecast that the third and fourth quarters would see a recovery, with GST cuts compensating for the recent demand lull and driving 10-20 per cent higher demand.

 

Commercial vehicle (CV) fleet modernisation is expected to accelerate following the cut in GST from 28 per cent to 18 per cent, said Girish Wagh, executive director, Tata Motors. “By resolving the long-standing issue of inverted duty for transporters, the move unlocks greater affordability and liquidity, strengthening the entire commercial mobility ecosystem.”

 

As for the farm segment, tractors will now attract only 5 per cent GST, compared with 12 per cent earlier, while GST on tractor tyres and parts has been slashed to 5 per cent from 18 per cent. “This move makes tractors and farm machinery more affordable for farmers while reducing costs for commercial vehicles,” said Rajesh Jejurikar, executive director and CEO (auto and farm sector), M&M.

 

Additionally, all auto parts will now attract a uniform GST rate of 18 per cent. The organised auto aftermarket, including spare parts, components, batteries, tyres, lubricants, and repairs, will benefit, as the pricing gap with the unorganised segment narrows, said Jitin Makkar, senior vice president and group head, corporate sector ratings, Icra.