GST is likely to bring in better margins, pricing for automobile industry

Written by Shweta Bhanot | Mumbai | Updated: Dec 31 2009, 04:35am hrs
While there is a lot of uncertainty on whether the goods and services tax (GST) will be implemented in April next year, the new tax structure is expected to bring in better pricing and margins to the automobile industry. GST is expected to bring down cost for the industry, which is currently marred by endless taxes charged at different state levels. If experts are to be believed, the cost savings will run into double-digits for the sector.

GST will eradicate those small tax windows and lead to seamless travel of products from one state to the other. It would remove multiple taxes and bring forth the right value of the products, said Abdul Majeed, an automotive practice leader with PricewaterhouseCoopers (PwC). He further added that the government is also expected to come up with a separate duty structure for small and electric vehicles citing the rising pressure to keep carbon dioxide emissions under check. Further, he said there is no clarity on what happens to the customs duty. The expected GST is around 18% (taking centre and states together).

The better pricing of vehicles, which at present are victim to the complex taxation structure, is seen as good news for all those potential buyers. On the flip side, GST also throws open the opportunity to original equipment manufacturers (OEMs) to improve margins. How will they do it It will be through better supply chain management as they look at more real time deliveries, says Ritesh Prasad, an automotive analyst with Datamonitor India.

Today, the OEMs look at stocking the vehicles in warehouses set up at various regions to avoid taxes every time the vehicle travels through states. The setting up and maintaining of the warehouse adds up to the cost to the OEM. Further, the cumbersome process at every state border delays the delivery of vehicles and adds up to the cost. GST is seen to ease out the cumbersome process and make movement of vehicles quicker and simpler. The better the turnaround, the better the scale of margins, says Prasad. Logistics costs make up to 2-3% of the sales of the OEM and it is this that the makers will be able to manage better, he added.

Rakesh Batra, partner and national automotive leader, Ernst & Young India, said, We expect the impact on GST to be positive on the industry, which will get credit to industry for things not covered today.

Mayank Pareek, executive officer (marketing), Maruti Suzuki India, said, The details of the GST are not out yet. But it would definitely simplify the process and remove the overlapping taxes in the market.

The principal broad-based consumption taxes that the GST would replace are the CENVAT and the service tax levied by the Centre and the value-added-tax (VAT) levied by the states. All these are multi-stage value-added taxes. In terms of the taxes, Maharashtra is the most expensive state with overall tax regime five-times higher than other states.