Tax relief may push sales in short term, but to hit revenue hard; rate cuts may be limited to certain segments.
Amid heightened expectations that the Good and Services Tax (GST) Council will cut the tax rates for a host of categories of automobiles as it meets in Goa on September 20, what concerns revenue authorities at the central and state level is the potential revenue loss. If the industry demand is for an across-the-board rate cut from the highest GST slab of 28% to 18% is to be met, the government’s GST revenue could take a hit of at least Rs 30,000 crore, according to the internal estimates of the tax department. This takes into account gains from the push to sales volumes once taxes are cut.
A report by Kotak Institutional Equities had earlier estimated that a 10% GST cut on automobiles across the board could cost the government Rs 45,000 crore in a year. While automobiles, including two-wheelers, attract 28% GST, they also are subjected to cesses that vary from 1-22% depending on the make of the vehicle.
While the Council’s fitment committee is gauging the implications of the rate cuts, several state governments are likely to oppose the move at the forthcoming meeting of the council, a tax official with one of the state governments said. At 18%, GST will automatically mean a rate reduction of more than ten percentage points as the GST Compensation Act doesn’t allow cesses on products that are not placed on the highest slab. The compensation proceeds are vital for states that are by law guaranteed a 14% year-on-year rise in GST revenue till 2022.
The auto industry has been demanding GST reliefs given the flagging sales. Auto sales across segments fell 20% year-on-year (y-o-y) in August, the sharpest monthly decline in nearly two decades. Passenger vehicle sales dropped by a steep 34% y-o-y in August and their sales had witnessed falls in 13 out of the last 14 months. Two-wheeler volumes too fell around 20% y-o-y in August and commercial vehicle sales plunged by a massive 40% y-o-y.
“There is expectation of volumes going up which might help overcome the revenue loss. Further, the rate reductions could be restricted to certain categories/products,” MS Mani, partner at Deloitte India, said.
But not everyone is convinced that a tax cut would be enough to boost sales.
Some also question the desirability of the move at a big cost to the exchequer. “At this juncture, reducing the tax rates in the automobile sector would marginally push a temporary demand for vehicles, but the overall impact of such a move would be a catastrophe for the public exchequer in long-term perspective,” Rajat Mohan, senior partner at AMRG & Associates, said.
Further, the government is wary that a tax rate cut would only serve to shore up margins of auto manufacturers and dealers (rather than consumers) as they could then roll back the current discounts.
The discounts being offered on passenger vehicles by Maruti Suzuki, Hyundai and Honda Cars have touched all-time high levels, as these manufacturers are keen to liquidate stocks that have piled up to above-normal levels owing to poor demand. Typically, a dealer operates on a margin of 3-6%. By sacrificing part of their margins, dealers are offering discounts, in addition to that given by OEMs, resulting in an increase in the net discounted amount.
Although the gross GST collection for the April-August period is just ahead of the monthly required rate to meet the Budget estimate, it is far from comfortable for the Council to resort to any drastic rate cuts for a sector like automobiles which are significant from the revenue perspective.
The estimate for GST mop-up for the current fiscal stands at Rs 11.89 lakh crore (assumed on the basis of the Centre’s budget projection) or Rs 99,000 crore/month. The collection so far has been slightly higher at Rs 1.02 lakh crore/month.
“Lowering GST rates would not only further reduce the overall GST collections which are struggling to keep pace with the budgeted targets, it could also tempt other sectors falling in highest tax bracket (like cement industry) to seek similar reduction on ground of slowdown,” Krishan Arora, partner at Grant Thornton India, said.
Finance minister Nirma Sitharaman on September 1 had indicated that the GST Council would take a call on the demand for tax cuts by the automobile industry veterans at its next meeting.
Transport minister Nitin Gadkari, while speaking at the 59th Annual Convention of the Society of Indian Automobile Manufacturers (Siam) on Thursday, said he would urge the finance minister to pay heed to the industry’s concerns, which led to a rallying of auto stocks. Recently, the GST rate for electric vehicles has been cut to 5% from 12%.