 "GST")
The Centre’s proposed goods and services tax (GST) reduction may push customers to delay their purchases until clarity emerges.
Moreover, electric vehicles (EVs) may lose their tax arbitrage, say analysts.
Kumar Rakesh at BNP Paribas Securities India said there is a likelihood that customers will postpone their purchases over the immediate near-term due to lack of clarity on GST taxation.
“This could have an impact on demand during upcoming regional festivals in Maharashtra (Ganesh Chaturthi in August-end) and Kerala (Onam in August-end and September first week). The primary festival season is when the bulk of auto purchases happen in India and it starts from September 22 this year. It would be key to get the revised taxation implemented by then,” he said.
He feared that the uncertainty could also create inventory issues in the near future as many original equipment manufacturers (OEMs) have started to build inventory ahead of the festival season.
Moreover, the move may not be favourable for EVs as one of the drivers of EV demand has also been the large tax arbitrage between internal combustion engine (ICE) and electric vehicles.
While EVs are taxed at 5 per cent GST, ICE vehicles are taxed at 28-50 per cent (including cess).
GST reduction could reduce tax arbitrage, making the case for EVs less favourable.
“Assuming the sub-4 metre segment electric passenger vehicles (ePVs) and less than 125 cc electric two-wheelers (e2Ws) are moved to an 18 per cent GST slab from 28 per cent currently, the tax arbitrage would reduce from 23 per cent to 13 per cent for e2Ws and from 24 per cent to 14 per cent for ePVs in the segment,” Kumar Rakesh said.
Overall, for the sector the move is positive and brings in the much-needed tailwinds.
Monday morning brought cheer for Indian auto stocks as the Centre’s proposed GST reduction move may be a much-needed boost for the sector, especially smaller cars, compact cars (under 4 meters in length), and entry-level two-wheelers.
Nifty Auto was up 4.1 per cent and major auto stocks including Maruti Suzuki (up 8.9 per cent), Tata Motors (1.78 per cent), Hyundai (8.45 per cent) and Hero MotoCorp (5.9 per cent) were in the green.
While the industry awaits clarity on GST slabs and cess on different auto segments, analysts and industry watchers widely believe that the automotive sector may now fall in the 18 per cent slab (from 28 per cent and above).
The cess imposed on top of GST rates on automobiles may be discontinued as well.
The move is likely to benefit smaller cars which have been under pressure. However, the current 28 per cent GST applies to small petrol and diesel cars with engine capacities of up to 1200 cc and 1500 cc, respectively, and under 4-metres.
For mid-sized cars and SUVs, the base slab remains 28 per cent, but additional cess takes the effective tax rate to up to 50 per cent.
“If implemented, this would be positive for the sector. SUVs, which currently face 28 per cent GST plus cess, may also gain if base GST rate is lowered, though cess may continue based on the vehicle size,” said ICICI Securities.
Maruti, Hyundai and Tata Motors have a significant proportion of their portfolios falling in the 28-31 per cent slab. Around 68 per cent of Maruti cars, nearly 62 per cent of Hyundai cars and 87 per cent of Tata cars fall in this slab that is set to benefit.
Historically, whenever taxation is reduced, the segment has seen significant traction. BNP pointed out that in 2006, central excise duty was reduced from 24 per cent to 16 per cent on cars not exceeding 4 meters.
“Consequently, we saw a jump in the growth of cars, reflecting a price elasticity of two times,” it said.
However, SUVs have been growing faster than smaller cars whose share in the passenger vehicle (PV) market has fallen for five consecutive years to 23.4 per cent in FY25.
Dealers are cautious about forecasting trends. CS Vigneshwar, president, Federation of Automobile Dealers Associations (Fada), said one would have to wait until there is clarity on the slabs.
“Small car buyers are a price-sensitive segment, and a slash in prices is welcome. However, when we say less than 4 metres or up to 1200 cc, we need to see whether any conditions like height etc are introduced in the tax rates. This would impact which cars stand to benefit,” he said.
Anurag Singh, advisor, Primus Partners, said, “It is interesting to note that SUVs and luxury cars that have higher taxation rate are growing fast, and small petrol cars with the lowest taxation rate are actually shrinking. So, the market is less sensitive to taxation, and more sensitive to product and ownership experience.”
As such, analysts expect price reductions in the range of 8 per cent for smaller cars if GST is brought to 18 per cent. HSBC Global Investment Research analysts said if the government considers to move bigger cars to a special rate of 40 per cent (from 50 per cent), prices may come down in the range of 3-5 per cent.
In a second scenario when there is a flat reduction of GST from 28 per cent to 18 per cent across cars and cess imposed is also the same, all vehicles across categories benefit with around 6-8 per cent reduction in prices.
“A flat 10 per cent cut would mean the government absorbs a revenue hit of around $5-6 billion, further derailing the fledgling traction of EVs in India and posing a political challenge as well,” HSBC said.
If cess is discontinued, it would hit half the GST revenues.
Sector analysts felt that GST reduction would negatively impact government revenues in the near term but drive up auto demand, and hence, job creation in India. PVs generate $14-15 billion in GST collection, and two-wheelers bring in $5 billion.
