Automakers hope GST will maintain status quo on prices

The Economics Times By Sharmistha Mukherjee & Ketan Thakkar Oct 20, 2016, 12.27 AM IST

NEW DELHI | MUMBAI: Carmakers are keeping their fingers crossed as they await the outcome of the Goods and Services Tax Council meeting that is likely to have a far-reaching impact on the industry.

The latest expectation is that the new tax structure that is set to come into force on April 1next year is unlikely to change the price that the buyer has to pay.

If the peak GST rate is fixed at 26% as was some suggested, the sector is likely to see a major shakeup. Big cars — on which the consumer currently pays as much as 52% in tax, central and state combined — will become much cheaper, threatening the current dynamics in an industry dominated by small-car companies.

However, that fear has receded after the first day of deliberations on Tuesday. The talk now is on imposing an additional cess on bigger cars, which will mirror the existing tax rates and thus maintain the differential tax structure for big cars and those which are less than 4 metres long.

Several people tracking the ongoing GST Council meeting said unlike the multiple incidence of taxation levied currently, the proposed tax structure will see a uniform rate of 26% on cars.

Since the current levels range from 29-52%, there will be an additional cess to recover the revenue loss due to implementation of GST, they said. “Unlike the expectation yesterday (Tuesday) that the bigger cars will gain, it is clear now, it will not,” said one of several people tracking the development from an auto industry perspective.

“GST is happening for simplification of taxes, then to give benefits to industries. In spirit, the council is looking at a minimum disruption from the existing rates. As for definition of compact cars by length and engine size, that too is likely to remain same, since this relooking at tax structure and not policy,” said an executive at a top carmaker.

Another senior industry executive said a uniform rate across all categories of vehicles was “highly unlikely” because that would imply same levies for two-wheelers as well as vehicles.

“More than 80% of users, especially the common man, are twowheeler consumers. A single rate is not feasible,” he added.

So GST is unlikely to lead to major changes in price and the benefits will be in the form of simplification of tax structure and improved efficiency in the supply chain, which could reduce the cost.

With a slew of new regulations on the horizon — over safety to fuel efficiency and emission norms — the industry was expecting to see benefits accruing out of GST to offset increased cost on account of the new rules, but that may not happen now. And this, say some executives, won’t help an industry that can play a big role in India’s manufacturing push.

“Continuation of existing different tax rates in GST regime will negate the very intention of government to help the Indian automotive industry to become globally competitive and thus complement the Make in India effort,” said N Raja, the sales and marketing head at Toyota Kirloskar Motor. “Any reduction in tax rate will stimulate demand which will be positive for us.”

Usually, any expected change in tax rates leads to deferral of purchase. The new tax slabs are likely to be announced in November, which will take away any ambiguity for future tax rates, said an executive.

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