The GST rate cut has cheered car buyers ahead of the festive season but is it good news for the auto industry?. The manufacturers no doubt are celebrating the expected jump in demand but auto dealers are struggling to adjust pricing. Many dealers had already stocked cars under the old 28% rate, including the compensation cess.
Now, as buyers expect deep discounts, selling these cars at the lower GST rate of 18% without the compensation cess could dealers have to offer discounts out of their own pockets. Losses across the industry are estimated at around Rs 2,500 crore, eroding working capital, according to a report by the Indian Express.
They are unsure whether there will be some relief in terms of refunds and where it might come from.
FADA raises alarm
According to a report by the Indian Express, the Federation of Automobile Dealers Associations (FADA) expressed concern over the situation in a letter to Finance Minister Nirmala Sitharaman. “ “While GST 2.0 subsumes the earlier Compensation Cess regime for automobiles, dealers today hold significant, validly-availed Compensation Cess balances in their electronic credit ledgers. Once no further cess liability arises, these balances cannot be utilised against CGST/SGST/IGST under the current law,” FADA added.
“Without a transitional pathway, credits risk lapsing, creating an unintended, permanent loss and causing a sharp working-capital shock for compliant MSME dealerships,” FADA added.
Discounts cut, purchases on hold
According to the Indian Express, at a Hyundai showroom in South Delhi, a manager said they are offering two prices—pre- and post-September 22 rates. “Usually, we give a discount of Rs 30,000-70,000 based on the car model. But now, the net hit per car is Rs 30,000-40,000, so discounts are being reduced accordingly,” he explained. The dealer has stopped buying new cars until the old stock of around 250 cars is sold.
Similarly, at a Maruti Nexa showroom, the manager said the festive season is seeing one of the weakest OND months in four years. Buyers demand deep discounts, expecting reductions based on lower GST for auto parts. “A car is not paneer. It does not get made overnight; it takes several months to be manufactured, and there’s a value chain,” he said.
Mahindra sales hold steady despite stock issues
Mahindra’s dealership manager said most of their cars have engines over 1200 cc and The GST reduction is not as sharp for bigger cars as it is for smaller cars. the showroom manager said. “We have only one car 3XO that has a 1.2 litre engine, every other car is of bigger dimension or capacity,” he said.
The company has announced price cuts but the dealer said the discounts are going to be there only for the cars to be delivered by September 21. “We are offering discounts till September 21, there won’t be much discount after the new GST rates come in,” he said.
Dealers struggle with compensation cess
Dealers are grappling with the issue of compensation cess already paid. Cars that left factories before September 22 were taxed under the old system but will be sold after the new rates. According to the Indian Express, the government held an inter-ministerial meeting to discuss these transitional issues.
Under the new GST rules, small cars with engines up to 1200 cc petrol or 1500 cc diesel and a length under 4 meters now attract 18% GST, down from 28% plus cess. Bigger cars now face around 40% tax, down from nearly 50% earlier. All automotive parts are now taxed at 18%.