Hero MotoCorp, Maruti Suzuki Biggest Beneficiaries Of Upcoming GST Rate Cuts Despite 'Temporary Blip'

The upcoming Goods and Services tax reforms as part of PM Modi's next- generation tax cuts for citizens, is all set to boost the demand and instill near-term growth for the auto industry. According to economists, India's consumer-driven sectors such as auto, FMCG, cement, housing, and others stand to benefit the most from the GST rate cuts. The GST Council, headed by finance minister, is expected to announce the new tax rates by Diwali.

In the current scenario, Vinkesh Gulati, Former FADA President, Vice President, Automotive skill Development Council, United Automobiles spoke to NDTV Profit an in exclusive interaction on the impact of the tax cuts on the auto sector. He was joined by Mumuksh Mandlesha, Research Analyst, Anand Rathi Institutional Equities, who covers the auto sector.

According to Vinkesh Gulati, customers are delaying purchases of new cars and the auto sector's bookings have significantly dropped for now. The temporary 'blip' in new vehicle bookings are due to the hopes of availing discounts once the new tax rates kick in, later this year.

"There's still confusion on the tax rates but we are expecting the GST rate on entry-level cars to go to 18%. A major postponement of buying new cars is seen in Maharashtra and the Southern parts of India." said Gulati. He explained that Ganesh Chaturthi and Onam have kickstarted the festive demand sentiment in the two regions. However, buyers are delaying their purchases in the hopes of the GST rate cuts to avail tax discounts.

"The GST rate difference between the current and expected level is too big so customers want to wait for the discounts. The auto dealers and OEMs cannot give discounts to customers ahead of the new GST rates," he said.

"If today a dealer or an OEM gives a 10% discount on a product till the new GST rate comes. Then, when the new GST rate kicks in, they absorb the GST rate discount and don't pass it, it won't be ethical on the company's side and will create a bigger problem in the market. OEMs already work on a wafer-thin margin," explained the former FADA President.

He added that the government is trying to prepone the announcement of the new GST rates. "We are still waiting, the announcement of the new GST rate can come even within the next 15-20 days. This period of slowdown will be recovered in the festive season demand," he said.

According to Mumuksh Mandlesha of Anand Rathi Institutional Equities, Maruti Suzuki India and Hero MotoCorp will be the bigger beneficiaries of the GST rate cuts as they are more exposed to the entry-level segment.

"A 10% reduction on the GST rate is a good reduction on small cars and the entry two-wheeler segment. The entire passenger vehicle segment and two-wheelers will stand to benefit from the GST rate cuts," said Mandlesha.

Coming to the commercial vehicle segment, Mandlesha said that some truck operators which take the input tax rate will not see a major changle or benefit from the GST rate cuts. "Tractors could also benefit from the tax cuts," he added.

Coming to the bigger cars, SUVs and premium vehicles are currently being taxed around a 50% GST rate, so even a 8-10% tax reduction for a Rs 10 lakh car is a big amount, according to Vinkesh Gulati. "A Rs 1.25-2 lakh discount on a premium car is a huge benefit that will likely be passed on to customers," explained Gulati. Hence, he concluded that the entire auto industry will benefit from the upcoming GST rate cuts.