GST rate cut for auto sector unlikely

Updated: August 17, 2019 3:00:52 AM

This had led to only 30 items remaining in the highest slab of 28% from the original list of as many as 235.

Already, GST collections fell Rs 1.6 lakh crore short of the target in the last fiscal, primarily due to large-scale pruning of rates.Already, GST collections fell Rs 1.6 lakh crore short of the target in the last fiscal, primarily due to large-scale pruning of rates.

By Sumit Jha & Pritish Raj

The GST council is in no position to consider any demand that has a substantial revenue impact, Bihar deputy chief minister Sushil Modi told FE, even as demands for trimming the goods and services tax (GST) rates for vehicles continue to pour in to help stimulate demand in the auto sector that, many believe, is facing its worst crisis in around two decades.

Already, GST collections fell Rs 1.6 lakh crore short of the target in the last fiscal, primarily due to large-scale pruning of rates.

This had led to only 30 items remaining in the highest slab of 28% from the original list of as many as 235.

According to an estimate, a rate reduction for two-wheelers to 18% from the current 28% will reduce the GST mop-up by about Rs 6,000 crore a year. Additionally, moving two-wheelers to a lower slab would mean that they won’t attract compensation cess — a collection within GST that helps fund states so that their revenue grows by 14% every year as constitutionally guaranteed.

Currently, two-wheelers attract a 28% GST and an additional cess of 1% for engine capacity up to 350cc. For bikes above 3500 cc, a 3% cess is charged. Over the last two years, as much as Rs 48,000 crore and about Rs 65,000 crore were disbursed to the states in FY18 and FY19, respectively, to ensure the guaranteed revenue growth rate.

However, in the absence of a push in the form of a GST cut, industry executives fear the slowdown in automobile sales — which have remained subdued since the second half of the last fiscal and resulted in severe job losses and closure of several dealerships–could further aggravate.

Sales of two-wheeler fell for the ninth consecutive month in July. Poor retail sales due to weak consumer demand have left the dealers saddled with high inventory. Little help from banks and NBFCs has led to closure of nearly 300 dealerships in the past 12-15 months. Similarly, car sales, which have remained subdued since July 2018, fell to new low of 31% y-o-y in July 2019, witnessing its sharpest decline in nearly 19 years.

Although the GST budget estimate for the current fiscal at Rs 11.89 lakh crore is just over 1% more than the actual collections in FY19, the Council wants to delay rate cuts to avoid slippage in the mop-up.

Last week, Anand Mahindra, chairman, Mahindra & Mahindra, said the most obvious and welcome first-aid would be some temporary relief on the GST front, either by modifying the slabs or by removing the cess. “I would appeal to lenders to take a more supportive approach to the suppliers and dealers, who are the backbone of the auto ecosystem,” Mahindra said.

In a meeting with finance minister Nirmala Sitharaman last week, top industry executives, including Maruti Suzuki Chairman RC Bhargava and Hero MotoCorp chairman Pawan Munjal, sought a stimulas package to revive demand, either by way of a GST cut or a relief in cess charges. Munjal had earlier said given that two-wheelers provided basic mobility to the masses, there was an urgent need to reduce the GST rate on two-wheelers from the 28% bracket of luxury goods to that of 18% for mass-usage items.

Besides GST rates, passenger vehicle and two-wheeler sales have been impacted by high prices due to hike in insurance premium last year and price hike taken by manufacturers on account of safety features provided to comply with the norms. The industry growth has remain subdued for around a year now partly due to liquidity crunch among NBFCs post the collapse of IL&FS and DHFL. Banks too have been cautious in lending and, as a result, interest rates have gone up.

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