GST Simplification Could Boost India’s Automobile Sector

India’s automobile sector could see significant growth in demand and job creation if the government proceeds with its proposed Goods and Services Tax (GST) simplification, according to a new report by HSBC Global Investment Research.

The Centre is considering reducing the highest GST slab on automobiles from 28% to 18%, while also scrapping the additional cess that currently applies to certain vehicle categories.

Currently, passenger vehicles contribute approximately USD 14-15 billion in GST collections, while two-wheelers contribute roughly USD 5 billion.

Under the new proposed structure, taxes on cars would range from 18% for small cars to a ‘special rate’ of 40% for larger cars, down from the current range of 29-50%.

The removal of cess could make small cars up to 8% cheaper and large cars 3-5% more affordable.

Impact on Key Automobile Manufacturers

HSBC notes that Maruti Suzuki India Ltd, the country’s largest carmaker, stands to benefit the most from the proposed GST changes.

With nearly 68% of its sales falling under the small-car category, Maruti could see a significant boost in demand if tax rates are reduced.

Mahindra & Mahindra, with its focus on electric vehicles, would also see some benefit, though to a lesser extent.

In contrast, an alternative scenario could involve a flat GST reduction from 28% to 18% across all cars, with cess still varying by vehicle size. However, experts consider this option less likely.

PM Modi’s Independence Day Announcement

In his Independence Day speech, PM Narendra Modi hinted at a major overhaul of the GST structure, though he did not provide specific details.

Reports suggest that the government is considering scrapping the existing 12% and 28% GST slabs and realigning most items into 5% and 18% categories. Certain luxury or sin goods may fall into a new 40% bracket.

The proposed changes could also benefit the two-wheeler sector. Global brokerage firm Jefferies stated that all major two-wheeler OEMs, including Bajaj, Hero, TVS, and Eicher, should benefit from a potential GST cut.

The firm indicated that the probability of differential GST rates for entry-level and premium two-wheelers is low.

In the passenger vehicle segment, the proposed GST cuts would be particularly advantageous for manufacturers like Maruti Suzuki and Tata Motors, who currently pay a 28% GST rate.

If the tax is lowered to 18%, these companies could see significant benefits in terms of demand growth. SUVs, however, face a higher tax rate of 45-50%, which is unlikely to change, according to Jefferies.

Commercial Vehicle Sector Gains

Commercial vehicle manufacturers could also see a positive impact. Motilal Oswal noted that reducing GST on commercial vehicles from 28% to 18% could drive demand for truck and bus makers like Ashok Leyland.

This could further contribute to the overall growth of India’s automobile sector.

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