A possible reduction in Goods and Services Tax (GST) rates can give a strong impetus to India's auto industry by revving up long-term demand and underpinning employment, HSBC Global Investment Research stated in a note on Monday.
The government is said to be considering a restructuring of the GST slabs, where the 28% rate can be cut to 18% with the abolition of the cess which is being imposed currently on automobiles.
Currently, GST collections from passenger vehicles (PVs) account for about USD 14–15 billion, while two-wheelers fetch about USD 5 billion.
"The details are not known yet, so we examine different scenarios and point out company-level exposure to different GST rates and a framework for investors to assess the relative advantage across OEMs," the report said.
Passenger cars currently qualify for GST between 29% and 50%, varying with engine size and length, as cess is added on top of the base rate. HSBC's study indicates that under the new system, taxes on small cars will fall from 28% to 18%, and a new "special rate" of 40% might be levied on big cars, doing away with the cess.
If this is put into effect, small car costs would drop by up to 8%, while bigger cars will be reduced by 3–5%.
"In this case, OEMs such as Maruti Suzuki India Ltd (MSIL) would be the primary gainer with increased exposure towards small cars (68 per cent volumes in 28 per cent category). For M&M, the proposed cut in GST is a tailwind too, although it is relatively disadvantaged due to increased exposure towards EVs," the report stated.
One other scenario, although less probable, is a uniform cut from 28% to 18% across the board and maintaining the vehicle-size-based cess. In this scenario, every car segment would experience a 6–8% decrease in prices.
"A flat 10 per cent cut would imply the government takes a revenue loss of about $5-6 billion," the report further stated.
Another possibility—reducing GST from 28% to 18% on all vehicles and phasing out the cess altogether—would simplify the tax structure immensely. But the report pointed out this result is extremely unlikely as it would shoot holes in government revenues and fully half of GST revenues would be at risk.
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