How would GST affect passenger car and motorcycle prices

Financial Express By Sukhpreet Singh April 10, 2017 1:45 PM

Four Goods and Services Tax bills have been passed by the Rajya Sabha not including the automotive industry directly for the time being. However, as the Government is inching closer to the proposed tax slab, how will it affect the manufacturers, OEMs and most importantly, potential vehicle buyers

Image Courtesy: inautonews

The Goods and Service Tax or a unified proposed bill for deduction of tax has been in talks for a considerable time now. Four of these GST slabs which include the Integrated GST Bill 2017, The GST (Compensation to States) Bill 2017, the Central GST Bill 2017 and the Union Territory GST Bill 2017 have been passed by the Rajya Sabha. None of the passed bills are directly impacting the Indian automotive industry, however, may have an indirect effect once introduced by July 2017.The expectation from the Indian Automotive industry is positive as there would be better transparency and one single percentage of tax levied on the consumer instead of a number of location based taxes such as Octroi.

Ankit Agarwal, Managing Director, Alankit Group, an e-governance platform also linked to other industries, said, “Alankit congratulates the Government for successfully getting the GST bill passed in Rajya Sabha today. This move will level the tax playing field for all businesses across the nation and bring everyone under One Tax ambit. From a long term perspective, the economy will see a reduction in prices of majority goods and services offered and exchanged in the domestic market. The entire nation would become one single market and enhance ease of doing business for national and international players. The current tax structure is meticulous and poses certain complications for select business sectors but the application of GST would ease this process and reduce the number from 17 tax slabs and segments to just one tax. Alankit recently concluded India’s first and largest GST summit in Delhi and we are one of the platforms to have pioneered the evangelisation drive towards ‘One nation- One tax’, we intend to lead the charge on consumer awareness and education in this space.”

But, what about vehicle prices once GST is implemented?

In an exclusive conversation with Express Drives, the Alankit Group's Ankit Agarwal stated that GST would definitely reduce the burden on manufacturers as well as potential buyers if implemented properly. In addition, the Government should look at getting more incentives under the FAME scheme for hybrid, mild hybrid and electric vehicles. This would also incline buyers to consider purchasing a 'greener' option over the conventional powertrain. In addition, GST would also reduce state-wise expenses like Octroi or any other additional duties levied on vehicles in a certain state.

Although the current rebate on the FAME scheme is considerable (up to Rs 28,000 for two-wheelers and up to Rs 1.38 lakh for four-wheelers), the availability of raw materials such as batteries for electric vehicles should be manufactured locally. This would further bring down costs. Another aspect that Ankit Agarwal suggested was that a proper infrastructure such as charging points should be made available so that adoption to electric vehicles is seamless.

How the current taxation system works and what was expected

The 'one country, one tax' GST would surely bring about more transparency in the system wherein the current tax slab is different for different categories. Cars below four metres in length incur about 25 percent tax. Post GST implementation, manufacturers expected it to drop to 18 percent. This would have meant a considerable relief in this price sensitive segment. For India, where most buyers consider the retail price of a vehicle as one of the first priority during a vehicle purchase, luxury cars too would benefit from the new tax rates. The current set of taxes on luxury cars incur approximately 50 percent tax which includes service tax, VAT or Value Added Tax as well as other cess charges such as Swach Bharat Cess and Krishi Kalyan Cess. The new slab would reduce the tax on luxury vehicles by 10 percent which would also relieve some cost to the consumer.

Mass market cars measuring above four metres may also witness a significant drop from 40 percent to 20 percent. That would translate into more affordable pricing which may also see some customers buying a Maruti Suzuki Ciaz instead of a DZire, as the difference in reduction between the two segments is considerable.

Moving over to the two-wheelers, GST's benefits would also be availed here. According to Yadvinder Singh Guleria, Senior Vice President, Sales & Marketing, Honda Motorcycles & Scooter India, “The GST rate and other terms of the tax are yet to be finalised. We expect the effective tax rate to come down (from the current 28% - 35% taxation rate as the two-wheeler sector faces as many as 13 different types of taxations). The new simplified and uniform tax structure will reduce the cascading effect of tax-over-tax, provide a 360 degree ease of doing business for the complete automobile ecosystem.”

Seems too good to be true, but, here is the flipside!

The GST structure for vehicles was revealed in November 2016 and since then there has been discouragement within the automotive industry. According to earlier claims, the new tax implementations would have made a number of relaxations unanimously across segments. However, the tax structure suggests that all cars except the luxury segment would fall under the 28 percent tax, basically no change over the existing structure then. Cars above four metres which do not fall in the luxury category would benefit from this structure which is currently at 40 percent. However, vehicles below four metres would have no change in the taxation policy as per the current proposal. This means that the most price-sensitive category would may not get any rebate. A turnaround for manufacturers to do would be to intrduce mild-hybrid technology which benefits under the FAME or Faster Adoption and Manufacturing of Hybrid and Electric vehicles. This would although bring up the cost of a vehicle in this category considerably and customers may go in for the mid-segment vehicles such as the Honda City.

So, will GST benefit a vehicle purchase in future?

Based on earlier assumptions, GST was expected to offer a significant relief to consumers as well as manufacturers, however, based on the current tax slab which is expected to come into effect by July 2017, there will be no price reduction in mass market sector. Potential luxury car buyers would get a considerable price drop wherein duties are expected to drop by approximately 10 percent. What the Government should ideally do is reduce taxes for lower segments to a considerable extent as most of these categories are the prime contributors in the country. Additionally, the Government should plan a roadmap wherein OEMs such as lithium-polymer battery manufacturer may avail a rebate for setting up a local manufacturing facility. How will the GST implementation affect car prices? It is bound to go down in most categories, but a clear idea would be once an official announcement is made.

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