GST: Auto industry pins hopes on tax simplification as consumers await big bang price cuts

Ahead of the crucial GST Council meeting to rationalise GST rates, the auto industry is pinning its hopes on the council simplifying the existing GST structure. The highly anticipated GST rate cut is poised to be a boon for buyers, driving demand during the festive season.

Currently, the GST base rate on ICE four-wheelers and two-wheelers is 28%. It is expected that the GST rate will be brought down to 18%, and luxury vehicles will be taxed at the highest 40% slab. 

However, along with the GST base rate, a compensatory cess was introduced by the government to compensate the states for the revenue loss resulting from the new tax regime. However, the cess structure is convoluted in nature, as different rates are applied depending on multiple factors, such as the length of the vehicle, engine displacement, and fuel type.

This has led to confusion in the past, according to analysts at Motilal Oswal, as the cess on mild hybrids is different from the cess on strong hybrids. However, along with the rationalisation of GST rates, the compensation cess is also likely to come to an end by October 31 this year, as per recommendations of the group of ministers headed by Minister of State (Finance) Pankaj Chaudhary. SUVs, for instance, which attract a total tax of 50%, are also expected to be brought under the new 40% rate. Furthermore, when the cess is removed, then SUVs would benefit from the GST rate cut.

According to InCred Equities, there is a higher probability of a GST rate cut for two-wheelers and compact cars, which is expected to benefit the two-wheeler industry and Maruti Suzuki , the largest maker of smaller cars, in the passenger vehicle industry.

However, for two-wheelers, deliberations are also on whether two-wheelers with an engine displacement of more than 350cc are considered “luxury”, or even if two-wheelers with an engine displacement of more than 250cc, according to Motilal Oswal. It is not clear as of now what the government will define as luxury for two-wheelers. Depending on the government’s definition of luxury, two-wheeler OEMs are expected to benefit on varying levels.

Some factors to watch out for include whether state-level incentives are provided to OEMs, which are contingent on GST collection by states and could be reduced due to lower GST rate collections. It is also to be seen whether dealer-level inventory losses after the GST rate change will be borne by the dealers or by the OEMs.

This would be important as August saw a build-up of inventory by two-wheelers ahead of the festive season. On the other hand, most passenger vehicle OEMs reported lower dispatches in August, likely due to inventory correction ahead of the GST rate cut, according to a note by BNP Paribas.

Another factor to watch out for is whether the rate cut will be entirely passed on to consumers, or if OEMs will absorb some part of the benefit in the form of reduced discounts. In this case, the full impact of the reduced GST might not be visible, according to analysts at Motilal Oswal. They also added that fast-moving models will not be impacted by the timing of the GST rate cut, as they will be liquidated soon. Slow-moving models, however, remain a cause of worry.