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Impact of GST on Indian car market

Impact of GST on Indian car market

Snapshot: Implementation of GST should ideally make Indian economy more robust, making all states a common market. What else will change with it's implementation, we take a look

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Even after 15 years of its proposal, the future of GST still hangs in the balance. As the monsoon session of the parliament is about to begin, automotive manufacturers and other business alike await for the clearing of the long pending bill. The government is hopeful that the bill would be cleared on the first day itself.

What is GST?

It would not be wrong if we call GST as the biggest taxation reform. The GST stands for Goods and Services Tax and is basically a proposed tax reform at the moment. And it would remain so until the bill is passed in the parliament that would put it into action. This is an indirect tax much like the VAT, service tax, entertainment tax etc. that we have at the moment and this would be levied by the state and centre in the form of State GST and Centre GST on the manufacture, sale and consumption of almost all goods and services all across India. It is aimed to transform the economy and boost the GDP.

History of GST

The model of the GST was proposed and designed in the year 2000 by the Vajpayee government. The deadline of April 1, 2010 was set for its implementation. The GST has been in news off and on for over 15 years now. Each successive government has tried and promised to implement it, but has not been successful so far. 

What would it do?

The GST is simply a common indirect tax meant to replace all existing indirect taxes like the VAT, entertainment tax, excise duty etc. and make the whole indirect tax system simpler. It would merge all the indirect taxes into a common tax that would come to know as GST. It should make governance and management much simpler in practice. It should ideally reduce hassles for business owners and consumer alike. With the implementation of GST India’s credentials as an investment destination and consumer friendly economy should improve and the cost of doing business should reduce too as an effect.    

How would the proposed GST rate impact car prices?

Manufacturers are divided on the GST and some have opposed the uniform tax structure and come out in favour of the differential structure. At present, the excise duty for vehicles is divided into four slabs, in which the smallest tax rate is applicable to small cars. With the GST in place taxes levied by the centre like excise duty and state levels taxes like sales tax, road and registration tax would all be subsumed into one. Manufacturers like Maruti Suzuki and Hyundai which derive major sales from the small cars are not in favour of this and prefer a differential rate for different segment of the cars.

It still remains to be seen if the small cars would indeed be grouped under standard good and services category. If the standard tax rate of 17-18 percent is accepted, the small cars as well as the big cars would get benefitted with GST implementation since the overall difference is in favour of the Industry and overall rates are expected to decrease.  

If the governments agrees to recommendations made by the panel, and put small cars (except luxury cars) in the standard goods and services category, the prices of small cars may reduce by as much as 10 percent, while the prices for luxury sedans as well as SUVs may see a drop of about 2-5 percent.

The trend among the auto industry is to pass the benefits to the customers. This is largely due to the absence of any cartels and the high cost associated with holding the inventory. For this reason, it’s believed that the proposed GST rate of even 18-20% would reduce small car prices by about 8-10%. This is an assumption made considering that cost factor i.e. price of input materials like steel, plastic parts, batteries etc. would not change much. So, an Alto that costs at present about Rs 3.49 Lakh to the customers can see a price reduction of almost Rs 25,000.

The steepest price drop would be in the case of compact sedans, so a difference of about 21% can make the Amaze cheaper by almost Rs 1 Lakh. 

Which car companies will get benefitted the most?

Companies like Mahindra and Mahindra would be perhaps the biggest beneficiaries of this, since it derives major revenue from the SUVs sales and it forms a large chunk of their portfolio. It’s expected that the manufacturer would pass the benefits to the customers. Anand Mahindra, Chairman and Managing Director of Mahindra Group had expressed his favourable views the last time GST was in the parliament for discussion.

Will the GST impact used cars too?

The GST bill at the time of introduction was aimed to increase the effective tax base by comprehensively covering all sorts of businesses. It was therefore expected that virtually all goods and services including used car businesses would be covered under it. If the used car businesses would have been brought under GST framework, it would have been done with a token levy of 1% tax, which would made used vehicle trade more organized and used cars slightly expensive. However, the government has scrapped the idea and the additional levy of 1 per cent proposed earlier would not be applicable.

If all goes well, GST would be applicable from July 1, 2017. Read more articles here!

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