Welcome to Forntech. I’m Ayan. The big story we are tracking this evening, Prime Minister Modi has proposed a major shakeup to the current GST regime.
Prime Minister Proposes Major GST Overhaul
The proposal is to end the current four slab structure and introduce a two slab structure with 5% and 18% as the tax rates. During his address on Independence Day, the Prime Minister made these proposals and urged the state governments to cooperate and ensure that reforms are undertaken ahead of Diwali. The group of ministers on GST rate rationalisation are scheduled to meet on the 21st of August.
Auto Industry Poised to Benefit
One of the sectors that will benefit from this move is the auto industry. Sources tell CNBCTV18 that there is a proposal to lower the GST rate on two-wheelers less than 350 cc and small cars to 18% from 28% earlier. Currently, vehicles are taxed under multiple slabs combining GST and cess depending on engine size, length, and ground clearance. The new proposal will aim to bring parity and reduce rates.
Automobile makers have welcomed the prime minister’s announcement. Maruti Suzuki chairman RC Bhargava told CNBCTV18 that people have wanted a rationalisation of rates for a long time. He added that the auto sector is now awaiting the GST council’s decisions. Mahindra and Mahindra’s Rajesh Jejurikar also said that this creates a great opportunity to make in India.
Industry Experts Weigh In
To take this discussion forward, I’m now joined by CS Vigneshwar, president at the Federation of Indian Automobile Dealers. Vinnie Mehta, director general at the Automotive Component Manufacturers Association. And also on the program with us is Jitin Makkar, senior vice president, group head, corporate ratings at ICRA. Gentlemen, thank you very much for joining us on the show today.
CS Vigneshwar, if I can begin with you. Do you see this with a sense of optimism? Something that will really go well for almost 51% of the car industry. And I’m saying this because almost 50 to 55% of sales still come from cars under 1200 cc and less than 4 m
Parikh, thanks for having us here. First of all, this is great news. It’s fantastic in the medium and long term. We’ve been asking for the rationalisation of the taxes, the GST, for quite some time, and this is really going to help in terms of reducing the expenditure that a customer has to go through for ownership of a car, and it’s going to be fantastic for car ownership or two-wheeler ownership. We are looking forward to this and how it’s really going to help us produce more cars in India. It is going to help the component manufacturers, OEMs and of course as the dealers by making sure that the customer is serviced at much lower rates than what it is right now.
First of all, this is indeed a very, very welcome step and a long-awaited step, and the component demand, as you know, is a derived demand of the vehicle consumption in the country. So if the vehicle consumption is going to go up, and if this benign measure is going to give a boost to make in India, we will benefit tremendously out of it. And secondly, the auto component industry has two businesses. One we supply to the OEMs and secondly there is the aftermarket that we service and the aftermarket is plagued with a lot of spurious and lot of gray operations because the components that are at 28% rate is an issue where there is a lot of gray activity that happens so if the rates are going to come down this is really good news we are going to make more in India now.
And Vinnie Mehta, if I were to try and understand from you how much of the component industry today is in the 18% bracket, how much of it is in the 28% GST bracket, and if you can explain to us in value terms as well.
Well, when the GST came in in the year 2017, almost I would say 40% of the auto components were in the 18% bracket and the rest 60% were in the 28% bracket, and we have been pleading with the government that we are an intermediary industry. So a higher rate is not sort of to our advantage. I mentioned to you about the challenges in the grey market, and the government has been kind enough to listen to us. So today, almost 60% of the auto components are at 18% but also a significant portion, which is the 40% remains at 28%. So 40% of the auto component tariffs are today at 28% which is a higher tax slab, and if the tax slabs go down to 18% for the auto component industry, it’ll be really helpful.
Of course. Let me go back to CS Vigneshwar at this point. Mr. Vigneshwar, we’re also entering a festive season right now. You’ve got Onam coming up, you’ve got Ganesh Chaturthi, you’ve got Durga Puja, lots of festivals over the next two months. Would you hope that there is at least some sort of clarity on the way forward soon? Do you expect customers to say, “Hey, I’m going to hold back my purchase till Diwali.”
Now, we are looking for some clarity, and so are our customers. So we’ve been listening with our OEMs, and we’ve also been trying to talk to the government sources. We are also meeting a few central ministers in the next couple of days. So perhaps we probably need to wait for a couple of days for us to understand what the implications are and how this is going to be implemented. We understand that the Council of GST ministers will be meeting only next month. However, we’ll be requiring clarity much before that so that we can take advantage and also the customers can take advantage of buying vehicles during the festival season.
All right. So let me now go across to Jitin Makkar from ICRA, who is joining us. Jitin, how do you think this is going to help the automobile industry? For a while now, for the last few years, the entry-level scooter motorcycle sales and entry-level car sales have been under stress. Will this reduction in GST, especially for motorcycles under 350cc, cars under 1200 cc, and sub-4 m, improve the sentiment at the entry point of the automobile industry?
Yeah, you’re right that the entry segment of both two-wheelers as well as passenger vehicles has been a segment which have been bearing the brunt of the slowdown in consumer demand. But I think when a rate cut like this happens, the simple answer, this oversimplified answer, would be that economics 101 would suggest that prices will come down and therefore volumes will go up. But I think this also needs to be looked at in the context that the overall construct of the proportion of cars that are currently dotting the passenger vehicle landscape has increasingly and significantly shifted towards higher capacity vehicles larger larger-sized vehicles. So, because of this, I think the consumer demand itself has been moving up the value chain, and the premiumization of the passenger vehicle industry has been happening, notwithstanding the fact that they come with higher ticket sizes and also even though the changes in regulations and inflation have pushed up prices of automobiles. But yes, once a rate cut gets announced and gets implemented, rather than certainly, the consumers at the margin who were earlier not able to take that buying decision for an entry-level car or a bike, they are expected to come back to the market, and therefore it should be a positive for the entry-level bikes and the car segments.
And Jitin, if I were to ask you, what will be the cost differential, say between an entry-level SUV which is above 1200 cc or 1,500 cc and a small car, because nowadays with all the regulatory costs, even small cars end up costing around 7 to 8 lakh rupees. So what will be the cost differential between entry-level models of big SUVs and top models of your entry-level small cars? How much of a difference will it make?
I think the delta is quite substantial. It could be as high as 2x. So an entry-level car could be in the region of say 5 lakh rupees, and an entry-level SUV or really entry-level SUV could be in the region of 11 lakh rupees. And therefore that differential is substantial, but I think the customer segment that goes for entry-level cars or bikes is very different from a customer who is going for higher capacity or specification vehicles.
Let me go back to CS Vigneshwar at this point. Mr. Vigneshwar, how do you see the industry benefiting from this reduction in rate, considering that you know you’ve got raw material costs going up, regulatory costs going up? So, overall, the vehicle prices, you know, they will continue to see an uptick. How do you see this impacting demand over the next four to 5 months, in case this becomes a reality come Diwali?
If this becomes a reality, it’s going to be a bumper Diwali. Of course, more people want to get into a car or purchase a bike. We also need to understand that, as you rightly mentioned that the pricing of a car would include the raw materials, and the discounts being offered would include the taxes on it. So perhaps because right now we’ve been having great discounts going on, great offers going on, perhaps this is going to go away. We don’t know. So at the end of the day, we probably need to look into the current situation. The current situation is that the taxes are quite high, and a reduction in taxes would be welcomed by all of us because it really helps us sell these vehicles at more affordable costs and affordable schemes to customers, and that’s the most important thing. So we had also represented some time ago regarding bringing out GST, and we really thank the government for doing it. And this is really going to help customers and businesses in the long term.
Right. Vinnie Mehta, my final question to you as the prime minister has now promised that big GST Diwali gift. Would there be any other measures that you would recommend to the government in terms of GST simplification, ease of taxation in the country, and ease of business?
I think the government is pretty much focused on all this. There’s an overarching theme which is of ease of doing business and therefore resolving challenges in GST is also a part of it and the only thing I would like to request to the government is that sort of do please ensure that there are no inverted tariff structures because you know even now you will have the electric vehicles at 5% and the components for the electric vehicles at 18%. Although there’s a mechanism to offset that but it’s a little bit cumbersome. So we really need a simpler process to address challenges on the front of inverted tariff structures, otherwise we are really very thankful to the government, and as you said, and as the prime minister said, we’re looking forward to a bumper Diwali.
Key Takeaways and Next Steps
So that’s an important point: address the issue of inverted duty structures that makes manufacturing that make the cost process more cumbersome, make that simpler, address that up front. Thank you very much, Vinnie Mehta, Jitin Makkar, and CS Vigneshwar, for joining us.