GST 2.0: Auto Sector Leaders Cautious Over Immediate Gains, Project Long-Term Growth

The rationalisation of goods and services tax is likely to boost demand for the auto sector, benefiting multiple stakeholders across segments.

The GST Council has now retained only a two-tier structure with rates of 5% and 18%, eliminating the existing 12% and 28% tax slabs. The new GST rates will come into effect from Sept. 22. The GST Council has introduced a special 40% tax for luxury items and sin goods.

This policy shift is expected to boost growth for the automobile industry, as it coincides with the upcoming festive season, a period traditionally marked by strong consumer demand.

Electric vehicles will continue to attract a GST rate of 5%, while other categories have now been put under either 18% or 40%, depending on the vehicle segment. Under the revised GST structure, small cars, bikes, SUVs and tyres will now fall under the 18% tax slab.

Leaders from the automobile industry have hailed the GST reforms as a move that will spur long-term demand among customers.

With the reduced tax rates, farmers across the country can look forward to a significant price drop on new tractors, with prices expected to fall by as much as Rs 40,000 to Rs 60,000 per unit, according to Bharat Madan, chief financial officer at Escorts Kubota.

“This is a win-win for everyone. I think Rs 40,000 to Rs 60,000 impact on a per-tractor basis is significant. How much additional demand we get, I think that’s just anybody's guess,” he said during a conversation with NDTV Profit on Thursday.

While the industry initially projected mid-single-digit growth for the year in the range of 4% to 7%, the GST cut could push this towards double digits.

“Post this rate cut, maybe it'll have some positive momentum, maybe you can also hit double digit,” he said.

However, Madan cautioned that the transition may pose challenges, particularly for dealers managing existing inventory under the old GST structure. This creates a challenge related to Input Tax Credit.

The GST reduction also provides partial relief from the long-standing problem of the inverted duty structure, where the tax on inputs is higher than on the final product. 

“We'll still be under an inverted duty structure even though the incidence of inversion will probably come down significantly. Post rate reduction, maybe a 60-70% reduction will happen. That will only help the working capital,” he said.

Despite speculation, the GST rate for EVs has been maintained at a favourable 5%. Rajesh Jejurikar, chief executive officer (auto and farm sector) at Mahindra & Mahindra (M&M), called it a “very good signal”.

He credited the government’s consistent policy for enabling major players like M&M to plan long-term investments in EVs.

The tax cuts are expected to make vehicles more affordable, potentially spurring demand. Jejurikar noted that the combination of lower acquisition costs and declining interest rates could encourage consumers to upgrade to higher-end models.

While the long-term outlook is bullish, Jejurikar was cautious on an immediate boost to the performance in the current fiscal. He explained that due to existing production plans and lengthy supply chain lead times, a significant volume increase in the coming months is unlikely. 

“The ability to increase volume in this period by way of either capacity or even absolute production is very negligible. It's unlikely to see a significant gain in this financial year. This is really more about next year and the long term,” Jejurikar said.

Mahindra and Mahindra plans to pass on the full GST benefits to consumers, aligning with the government’s goal of boosting consumption, the top executive said.