Although 28% GST rate on two-wheelers is quite high, the government has its own constraints in terms of fiscal challenges and it is unlikely that the government can bring in rate cuts.
As major industry leaders in the automobile sector are witnessing a demand slowdown, companies need to take a step in self-help and not rely too much on government for rate cuts, a recent report said. “The Indian automobile OEMs may want to consider price cuts to stimulate demand in case the government is unable or unwilling to reduce GST rates,” a Kotak Institutional Equities report said. With India’s biggest carmaker Maruti Suzuki sales plunging to seven years low, the slowdown in the automobile sector has become evident.
Although 28% GST rate on two-wheelers is quite high, the government has its own constraints in terms of fiscal challenges and it is unlikely that the government can bring in rate cuts, said Kotak report. In fact, a 10% cut in Goods and Services Tax may cause a revenue loss of Rs 45,000 crore to the government. Instead, the government can give temporary tax benefits to new vehicle buyers directly at the time of registration. This will help in avoiding “potential controversy around pass-through of GST rate cuts, as has been the case in other products,” Kotak said.
With OEMs earning high returns, they have the legroom to cut prices. This will provide a lever to demand with the reduction in ownership cost of vehicles, the report said.
Further, the automobile companies can also look into grabbing onto the Electric Vehicle technology that it also getting the support of government policies. “The industry may want to get on to the ‘correct’ side of government policies and technology sooner than later,” said the report. The automobile companies also have an abundance of cash for funding the development of EV infrastructure. Meanwhile, the government has also shown a clear preference of EVs with GST rate cuts from 12% to 5% announced in the last GST Council.
How bad is automobile slowdown in India?
Recently, Maruti Suzuki reported the biggest slowdown in sales. Maruti Suzuki’s total sales slipped by 34% to 109,264 units in July. “The worst drop in sales since August 2012 at the unit of Suzuki Motor Corp indicates that the slowdown in Asia’s third-largest economy may be worsening, as a lingering credit crisis prompts creditors to go slow on granting new loans,” Bloomberg reported.