GoI may tweak GST rates to bring down car prices

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GoI may tweak GST rates to bring down car prices
The changes in the GST rates on some categories of automobiles will help to bring down prices and make them more affordable, helping the floundering sector find its feet.Courtesy: ANI

The automobile industry, the biggest success story in India’s manufacturing sector, has been struggling with falling sales and declining productivity for several years. The Covid-19 pandemic has only accentuated the trend. Now, there could be fresh hope for this sector that accounts for 40 per cent of India’s manufacturing GDP.

The Indian government is willing to consider changes in the GST rates on some categories of automobiles to bring down prices and make them more affordable, India’s Revenue Secretary Tarun Bajaj said at the recently concluded 61st Convention of the Society of Indian Automobile Manufacturers (SIAM).

“I would be very happy to engage with you to see what we can do even on (GST) tax rates, what is the tinkering we can do to see to it that certain (vehicle) segments get the encouragement they deserve,” he said.

Union Minister for Finance and Corporate Affairs Nirmala Sitharaman along with Minister of State for Finance and Corporate Affairs, Anurag Singh Thakur, and other dignitaries chairing the 42nd GST Council meeting.
Union Minister for Finance and Corporate Affairs Nirmala Sitharaman along with Minister of State for Finance and Corporate Affairs, Anurag Singh Thakur, and other dignitaries chairing the 42nd GST Council meeting.Courtesy: ANI

Hamstrung by high taxes

The industry, which has been struggling to push sales for the past few years, is hamstrung by high taxes, which is making all types of vehicles unaffordable for the common man. Bajaj, however, wanted to know if there were any other reasons for the lukewarm sales figures and hinted that the government is ready to work with the industry to address the issues it is facing.

Currently, all automobiles – from simple two-wheelers to high-end cars like Mercedes Benz – attract the highest GST rate of 28 per cent. State governments charge additional levies on top of this rate.

The industry says this is the main reason making vehicles unaffordable for many segments of society. SIAM has been lobbying for years with the government to lower GST rates in order to boost sales.

I would be very happy to engage with you to see what we can do even on (GST) tax rates, what is the tinkering we can do to see to it that certain (vehicle) segments get the encouragement they deserve.
- Tarun Bajaj, India’s Revenue Secretary addressing Society of Indian Automobile Manufacturers
The health of the auto sector is critical for the Indian economy as it is clearly the biggest success story in the country’s manufacturing sector and accounts for more than 40 per cent of manufacturing GDP.
The health of the auto sector is critical for the Indian economy as it is clearly the biggest success story in the country’s manufacturing sector and accounts for more than 40 per cent of manufacturing GDP.Courtesy: Getty Images

Sales at multi-year lows

Automobile sales volumes, which had been floundering even before the Covid-19 pandemic struck in two separate waves last year and earlier this year, are at multi-year lows despite some pick-up in sales in recent months.

The numbers tell a bleak story. According to figures published in ET, a leading Indian financial daily, passenger vehicle sales in 1999-2010 grew at a CAGR of 10.3 per cent compared to 3.6 per cent in the decade that followed. For two-wheelers, the comparable figures are 9.8 per cent and 6.4 per cent.

For commercial vehicles, which are often seen as a proxy for economic activity, the figures for the two successive decades are 12.7 per cent and 3 per cent, respectively, while for three-wheelers the growth figures are 9.8 per cent and 3.8 per cent, respectively.

In absolute terms, vehicle sales in 2020-21 were lower than the level recorded in 2015-16, for two-wheelers, they were below 2014-15 levels, for commercial vehicles the numbers were lesser than they were in 2010-11 and for three-wheelers, the comparable year was 2002-03.

Automobile sales volumes are at multi-year lows. In absolute terms, vehicle sales in 2020-21 were lower than the level recorded in 2015-16, for two-wheelers, they were below 2014-15 levels, for commercial vehicles the numbers were lesser than they were in 2010-11 and for three-wheelers, the comparable year was 2002-03.

Biggest success story in India’s manufacturing sector

The health of the auto sector is critical for the Indian economy as it clearly the biggest success story in the country’s manufacturing sector and accounts for more than 40 per cent of manufacturing GDP. It employs 37 million people, or more than 8 per cent of India’s workforce and clocked a turnover of $55 billion in 2018-19.

Then, the sector is considered a proxy for the broader economy as every sector and individual needs some transport solutions. Further, since the sector has backward and forward linkages with more than 200 feeder and downstream sectors, the sale of every new vehicle at a showroom impacts the fortunes of millions of people associated with these industries in one way or the other.

Acknowledging the contribution of the automobile sector, Amitabh Kant, CEO of Niti Aayog, the government’s official think tank, said: “It will be impossible for India to grow at high rates for a long period of time without the automobile sector being the key driver of India's growth.”

Industry leaders speak their mind

Industry veterans, however, rued the fact that the government still seemed to consider automobiles to be a luxury item that only the rich use. In a rare instance of an industry leader openly speaking his mind on contentious issues at an open forum, R.C. Bhargava, Chairman of Maruti Suzuki India, the country’s largest passenger vehicle maker, said: “We have been going through a situation where this industry has been declining over a long period of time. The GST rates in India are more than double that of the European Union, Japan or the US, and given the lower income levels in India, the question of affordability comes in.”

The road tax in India is 8-9 per cent. This is charged over and above the GST rate of 28 per cent, taking the minimum tax to 37 per cent. Then, there are other levies imposed by states. By comparison, vehicles taxes in Japan are 18-22 per cent and in Germany they are at 19-20 per cent.

Industry veterans rued the fact that the government still considers cars a luxury item. In a rare instance of an industry leader openly speaking his mind, R.C. Bhargava, Chairman of Maruti Suzuki India, said: ‘The GST rates in India are more than double that of the EU, Japan or the US, and given the lower income levels in India, the question of affordability comes in’.

Affordability a big issue

“Do we need these kinds of high taxes?” Bhargava asked, adding: “There have been a lot of statements about the importance of the automobile industry, but in terms of concrete actions that would reverse the decline in trend, I haven't seen any action on the ground.”

He pointed out that the industry has adopted European standards of safety and emissions, pushing up costs substantially even as employment in the sector had stagnated over the last three years.

“We have always forgotten customers in the centralised system,” he said. “If we want to improve the penetration of vehicles from 25 (per 1,000 people) to 200, it requires millions of cars to be made every year and an equal number of buyers. Are we sure that at the current rate of employment and income, we will be able to match the desired level?”

Need next-generation infrastructure

In a written address to the convention, Prime Minister Narendra Modi said the Indian automobile sector needs to create next-generation infrastructure, develop world-class manufacturing and new-age technologies. “There are rapid changes taking place in technology, lifestyle and economy, and old approaches and practices have to be changed. It is also crucial to protecting our environment, resources and raw materials and resources,” he said.

But most importantly, from the industry’s perspective, is the fact that the government has committed to taking another look at the tax structure that could lead to lower prices and, hopefully, drive higher sales.

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