GST Rate Cuts Could Accelerate Auto Sales, Support Job Creation: HSBC Report
India's auto sector may see higher demand and job creation if the government cuts the top GST slab on cars from 28% to 18%. Maruti Suzuki and Mahindra & Mahindra could benefit.
India's automobile sector could see a long-term boost in demand and job creation if the government goes ahead with its proposed Goods and Services Tax (GST) simplification, according to HSBC Global Investment Research.
The Centre is reportedly considering reducing the highest GST slab on automobiles from 28% to 18% and scrapping the additional cess. Passenger vehicles currently contribute USD 14–15 billion in GST collections, while two-wheelers bring in around USD 5 billion, the report mentioned.
At present, taxes on cars range between 29% and 50% as cess is levied over GST, depending on engine capacity and size. Under the new structure, small cars may see their tax rate drop from 28% to 18%, while large cars could face a 'special rate" of 40%, with the cess removed. This could make small cars cheaper by up to 8% and large cars by 3–5%.
HSBC noted that Maruti Suzuki India Ltd would benefit the most from such a move, as nearly 68% of its sales fall under the small-car category. Mahindra & Mahindra would also gain, though to a lesser extent, given its higher tilt towards electric vehicles.
An alternate scenario, though considered less likely, could involve a flat GST reduction from 28% to 18% across all cars, with cess still varying by vehicle size.
Prime Minister Narendra Modi in his Independence Day Speech during the weekend announced a major overhaul in the Goods and Services Tax (GST) structure. Though he did not announce any details, reports said the Centre is considering scrapping the current 12% and 28% GST slabs, realigning most items into the 5% and 18% categories. Certain sin or luxury goods may be placed in a new 40% bracket.
Global brokerage firm Jefferies in its note said, 'All the listed 2W OEMs – Bajaj, Hero, TVS, and Eicher – should benefit from this cut. We see a low probability of differential GST between entry-level and premium 2Ws."
In passenger vehicles, small cars currently face an effective tax of 29-31% including compensation cess, making Maruti Suzuki one of the biggest potential beneficiaries of a rate cut. SUVs, however, are taxed at 45-50%, a rate Jefferies said is unlikely to change.
'Hybrid vehicles attract a similar GST rate as ICE vehicles, compared with 5% for EVs. Any reduction in GST on hybrids could be positive for Maruti," the brokerage added.
Commercial vehicles, also taxed at 28%, may see a reduction to 18%. Ashok Leyland, along with Tata Motors and Eicher Motors, would be key gainers in such a scenario, Jefferies said.
Domestic brokerage firm Motilal Oswal Financial Services in its report on August 18 said automobiles will be one of the key segments that stand to benefit from GST rationalisation.
Passenger vehicle makers Maruti Suzuki and Tata Motors, currently paying 28% GST, are expected to benefit significantly if rates are lowered to 18%. Commercial vehicle maker Ashok Leyland may also see demand tailwinds as GST on trucks and buses comes down to 18% from the current 28%, said Motilal Oswal in the report.
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