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What Goes Where: How GST Impacts Automotive Sector

The new GST reforms set to be launched by July 1 2017 promises a mixed bag for the automotive sector. While the price of some class of vehicles may get cheaper, some others may get more expensive, as per the indications of the GST council. Here is a comprehensive look at the automotive sector and the GST effect

OTR: OTR vehicle manufacturers and buyers have long suffered from an inverted duty structure. This is a situation where the import duty on finished products is low compared to the import duty on raw materials that are used in the production of such finished goods. For example, the tractor industry was subject to 28% duty on components and 12% on tractors which created a cost escalation in the manufacturing. Now the GST council has addressed this by reducing tax on components to 12%, thus eliminating the inverted duty problem. While the tax incidence for OTR vehicles has remained relatively stagnant, removal of the inverted duty structure implies a big win for the OTR market.

Two Wheelers, Three Wheelers and Commercial Vehicles: Currently two-wheeler sector faces as many as 13 different types of taxations with a cumulative tax burden of 28%-35%. The GST rate for two wheelers is expected to be between 28%-30%, except for 350+ cc bikes which will attract a 31% tax rate (28% slab plus 3% cess). On the whole, GST rates are likely to be almost neutral for both two wheelers and commercial vehicles and would marginally increase for three wheelers. Earlier three wheelers didn’t come under the NCCD (National Calamity Contingent Duty) which lowered its tax incidence. Overall the scenario looks relatively neutral for the Two Wheelers, Three Wheelers and Commercial Vehicles market post GST.

Passenger Cars: Passenger cars have been defined in two separate categories by the GST council, with several sub segments under the two major segments. Small cars will face a tax burden of 29% down slightly from the previous rates. Further, petrol cars will face a cess of 1% and diesel cars in the segment will face a cess of 3% on top of the applied GST rates, inducing slight tax savings for petrol and a small tax incidence for diesel small cars. Mid-size vehicles and large cars stand to gain handsomely with the GST. Mid-size segment sees a drop of about 4.3% in tax burden, large cars (defined as cars with engines over 1500 cc) stand to save 6% and SUVs stand to save around 12.3% with the flat GST rate of 43% being applied to all three categories. Overall the effects on mid-size and small vehicles is negligible while luxury vehicles win big, implying an overall positive sentiment for GST vis a vis passenger car segment.

Society of Indian Automobile Manufacturers (SIAM) has hailed the GST council decision.  As per Vinod Dasari, president of SIAM “The rates are as per the expectations of the industry and almost all segments of the industry have benefitted by way of a reduced overall tax burden in varying degree. This will pave the way for stimulating demand and strengthening the automotive market in the country, paving the way for meeting the vision laid down in the Automotive Mission Plan 2016-26”. While the status quo has been maintained for a majority of products, taxes have been lowered on several other making GST net-net a potential headwind for the automotive sector.

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