Auto Industry Seeks 10% GST Rate Cut As Cleaner, Safer Vehicles Push Up Costs

Battling a slowdown, the automotive industry has urged the government to reduce the goods and services tax to offset higher costs of rolling out stricter safety features and cleaner Bharat Stage VI emissions standards.

“Various regulatory changes, including mandatory safety features like ABS (anti-lock braking system), CBS (combined braking system) and airbags have led to an increase in the cost of vehicles,” Rajan Wadhera, president of the Society of Indian Automobile Manufacturers, told BloombergQuint. 28 percent GST is levied on vehicles, while auto companies are hardly making 7-8 percent, he said. “The reduction in tax will help the auto industry offset some impact of the safety and regulatory changes.”

Automobiles sales have slowed down since the festive season last year as increased upfront insurance costs and higher fuel prices kept buyers away. That caused the inventory to pile up at dealerships. Discounts failed to lift demand, forcing automakers to cut production. The new emission norms threaten to amplify the industry's problems.

The government had announced in 2016 that India would skip BS V norms and adopt BS VI norms by April 2020 to move to cleaner fuels, helping curb the world's most toxic air. Maruti Suzuki India Ltd. and Tata Motors Ltd. have already said that they would stop making diesel cars by 2020 as the increased costs would have made the vehicles unviable for them and consumers.

YS Guleria, senior vice president of sales & marketing at Honda Motorcycle & Scooter India Pvt. Ltd., estimated that the new safety and emission norms would increase the costs of motorcycles and scooters by on an average 15-20 percent. “The impact of the slowdown in the auto sector and declining capacity utilisation is visible on several organised and unorganised players,” Guleria told BloombergQuint. Contractual workers in the supply chain have been laid off, he said, adding the government should review the GST slabs to restore growth as demanded by some SIAM members.

Will A GST Cut Help?

The government, according to an analysis by Nomura, will have to forego Rs 30,000 crore in tax revenue if GST on auto parts is reduced from 28 percent to 18 percent. The analysis assumes a volume recovery of 5-10 percent across the sector. “A GST rate cut could lead to 10 percent increase in volume estimates and 15 percent increase in operating profits to current estimates due to lower discounting pressures on segments where it's implemented.”

And lower tax rates have helped in the past, the brokerage said in a note. A 6 percent tax cut in December 2009 led to 25 percent volume growth in automobile companies between FY10 and FY12, according to Nomura. A duty cut of 4 percent in February-December 2014, its said, aided volume growth.