Mumbai, Aug 19: The upcoming reduction in Goods and Services Tax (GST) is expected to boost long-term auto demand and support job creation in India, HSBC Global Investment Research said on Monday. The government is considering simplifying the GST slabs in India and may reduce the 28 per cent slab to 18 per cent and also abolish the cess levied on top of the GST rates on automobiles.GST collections from passenger vehicles (PVs) are worth USD 14-15 billion and from two-wheelers, USD 5 billion.
“The specifics are unknown so far, hence we look at various scenarios and highlight company-level exposure to various GST rates and a framework for investors to evaluate the relative benefit across OEMs,” said the report.
Currently, GST on PV vehicles ranges from 29 per cent to 50 per cent, as cess is levied over GST depending on the size (CC and length) of the vehicle. The report suggests that in the new regime, the government may reduce tax on small cars from 28 per cent to 18 per cent and introduce a “special rate” of 40 per cent for large cars and abolish the cess on top of GST.
This would mean that prices of small cars could come down by up to 8 per cent, while prices of large cars could come down by 3-5 per cent.
“In this scenario, OEMs like Maruti Suzuki India Ltd (MSIL) would be a key beneficiary due to higher exposure to small cars (68 per cent volumes in 28 per cent category). For M&M, the proposed GST reduction is a tailwind as well, though it is at a relative disadvantage due to higher exposure to EVs,” the report maintained.
Flat reduction from 28 per cent to 18 per cent across size of cars and everything else remains the same is a simplified regime, though a less likely scenario where the basic GST may be reduced from 28 per cent to 18 per cent and rest of the cess imposed on cars based on the size of vehicles remains the same.
“In this scenario, all vehicles across categories benefit with around a 6-8 per cent reduction in price. A flat 10 per cent cut would mean the government absorbs a revenue hit of around $5-6 billion,” the report noted.
Flat reduction from 28 per cent to 18 per cent across size of cars and discontinuation of cess would significantly simplify the tax structure but a very unlikely scenario as it would be a significant impact on government revenues (around half of GST revenues would be hit).