The Indian auto industry, weighed down by weak market sentiment and regulatory issues, is seeking relief from the government in the form of reduction in goods and services tax (GST) on passenger vehicles (PVs) and two-wheelers in the 2019-20 Union Budget on July 5.

This will be the first Budget of the Narendra Modi-led National Democratic Alliance government which returned to power with a thumping majority in the recently concluded general election. This will also be the first Budget of the new finance minister, Nirmala Sitharaman, who handled commerce and later defence portfolios in the previous government.

The industry is going through a slowdown wrought by a combination of factors such as rising fuel prices, muted consumer sentiment, the transition from BS (Bharat Stage) IV to BS VI emission norms, and increased insurance costs, etc. It is bracing for a further dampening of demand due to a 10-15% price hike from the shift to new emission standards. It expects the cut in GST on PVs and two-wheelers from 28% to 18% to help it in this trying period.

“We want the government to be sensitive to the fact that BS VI emission introduction (from April 1, 2020) and other safety regulations will add to the cost,” Society of Indian Automobile Manufacturers president Rajan Wadhera said. “If it adds to the cost, it is likely to lead to a slowdown in demand. In PVs also, the prices are going to go up, in the range of 10-15% due to technology and safety enhancements. There also we need serious considerations by the government”.

“If demand goes down, the collection of taxes by the government would also go down. Therefore, for a win-win situation, we are seeking 18% GST on automobiles,” he said.

Currently, a GST rate of 28% with an additional cess of 1-22% is applied on automobiles according to its length, and type and size of the engine; two-wheelers with engine capacity below 350 cc are taxed at 28% and those above at 31%.

According to Wadhera, a price hike of even 10% would impact the sales of the two-wheeler segment, which currently witnesses an off-take of over 22 million units annually.

Electric vehicles makers also expect the Centre to review the current taxation framework applicable to raw material and the final product. Tarun Mehta, CEO and co-founder of Ather Energy, says a comprehensive GST refund structure of electric vehicle manufacturers or a reduced GST liability on the raw material should be assessed for seamless cash flows in the long run.

“The central government has been consistently supporting and promoting the adoption of electric vehicles and it has had a positive impact on the market. As the industry matures, it will need long-term policy support and predictability, which will allow OEMs and ancillary players to make deep investments. There is an inherent inverted duty structure as the GST input on raw material and other overheads are on average of 18 % wherein the output is pegged at 12%. The proposed reduction of the GST on EVs to 5% will increase this delta,” Mehta says.

“This structure results in significant working capital blockage. Even with the existing GST inverted duty refund framework in place, there is a working capital blockage on the overheads and capital investments,” adds Mehta.

Chetan Maini, co-founder and vice-chairman of SUN Mobility, says, “The reduction of GST on electric vehicle chargers from 18% to 12% is an encouraging move; however, it will not have an impact on the growing number of EV users who will be utilising energy as a service (offered by public/private players). The real benefit to customers will be if the GST on EV charging and battery swapping services is reduced to 5% (from the current 18%).”

The Society of Manufacturers of Electric Vehicles (SMEV), too, said there was a need to create a robust ecosystem for electric vehicles and give a boost to the commercial segment. “We strongly advocate the imposition of a notional green cess on the polluting vehicles and use it to accelerate electric mobility. It would generate massive funds and reduce the burden on the government exchequer. This fund could be utilised in the frontloading of incentives to customers and bring electric two-wheelers prices down to the level of petrol two-wheelers,” Sohinder Gill, director general, SMEV said.

He said "rationalisation of taxes could play a significant role" to encourage industries and customers to adopt e-mobility. “The government can give relaxation from taxes for a specific period to those who go for green vehicles and contribute their bit to saving the environment,” said Gill.

Deloitte India also feels that GST cut on electric vehicles is a good idea. “In order to accelerate the adoption of electric mobility in India, there are various fiscal and non-fiscal incentives under consideration. Reduction of GST will result in reduced upfront purchase price of electric vehicles and will provide a fillip to this direction,” Pranavant, partner, Deloitte India.

Automakers including TVS Motor Company, Hero MotoCorp, and Bajaj Auto have already sought a GST rate cut on automobiles for helping create demand and pushing the sector to bounce back. However, not all automakers are siding with this view.

“The current rate of GST on two-wheelers is on par with the earlier tax rate of excise and value-added tax (VAT) and does not require changes,” Pawan Goenka, managing director, Mahindra & Mahindra, had said in a statement. Even Maruti Suzuki’s chairman R.C. Bhargava said the government’s vision of providing inclusive growth and improving infrastructure cannot be met with a cutback in revenue streams.

Follow us on Facebook, Twitter & YouTube to never miss an update from Fortune India. To buy a copy, visit Amazon.