For quite some time, the automobile industry has been demanding a GST rate cut on vehicles — the total tax, including compensation cess, can go as high as 50% in the case of a certain class of cars — to boost demand. However, the government has instead asked them to take cost-cutting measures such as reducing royalty payments to their parent companies abroad.
The closest the government came to hinting at the possibility of any GST cut was the recent statement by finance minister Nirmala Sitharaman that there is a case for reduction of GST rate on two-wheelers as these are neither a sin good, nor luxury. It must be noted that the pandemic has forced a large section of middle or lower income group of population to use two-wheelers over public transportation, and two-wheelers are currently taxed at 28%.
Recently, Maruti Suzuki, the country’s largest carmaker, had said there is no immediate need for GST rate cut on passenger vehicles with demand looking good for the next few months. But it added that the government can look at GST relief if demand tapered off in the future.
With the festival season approaching and sales picking up, the industry did not want to risk any postponement of purchases by customers if speculation regarding tax cuts gained currency, so it stated that demand scenario is fine till December, but there could be problems after that and perhaps that may be the right time to look at a GST cut.
Saurabh Agarwal, indirect tax partner, automotive sector, EY India, says that while the auto industry is seeing a recovery trend, it is important that this trend is maintained post-festive season too. “It is a continuous suggestion from industry associations that two-wheelers, in particular, are not sin/luxury goods and thus merit a rate cut from 28% to 18%,” he says.
He adds that an active monitoring of the overall auto industry performance post-pandemic is required. “Where the demand shows signs of saturation, then the GST rate cut (where done for a temporary period) is likely to boost the demand for vehicles”.
Aryaman Tandon, director & practice leader, automotive, Praxis Global Alliance, says that even though there is a recovery in sales, sales in FY20 (pre-Covid-19) were significantly below the FY19 peak levels when 3.4 million cars and 21.2 million two-wheelers were sold. “FY21 sales are expected to be below FY20 in both two-wheelers and four-wheelers even though demand green shoots have appeared,” Tandon says. “A rate cut during the next GST Council meeting will provide a boost to the industry, which will bring in fresh investments and create additional jobs due to the anticipated demand boost.”
He adds that the rate cut should be applied on both two-wheelers and four-wheelers as the demand slump was observed across both the sub-segments during FY20 and the current pandemic.
At the same time, a GST rate cut shouldn’t be seen as ‘relief’, but as ‘rationalisation’. Madan Sabnavis, chief economist at CARE Ratings, says that any change in GST rates has to be looked at from a medium-term perspective and not short-term. “Ideally, you cannot lower GST for any commodity simply because sales are down right now and you want to prop-up sales and consumer confidence. It (GST reduction for the auto sector) has to happen as a part of policy — if it is felt that rates are on a higher side and deserve to be rationalised.”