Will GST rate cut on two wheelers bring festive cheer?

As the government pins hope of a possible Goods and Services Tax (GST) cut on two-wheelers, both the the industry and the buyers, look on with an eager eye.

Aug 28, 2020 SHWETA BHANOT MEHROTRA No Comments Like

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Times are grave as auto industry has seen de-growth of 75.49% (-75.49%) in domestic sales for the period between April-June 2020-21, with two-wheelers domestic sales de-growth of 74.21% (-74.21%).  The COVID-19 pandemic has ripped the economy and the auto industry severely. Things are slowly limping back and hopes have now been pinned on the festive season. 

In July, the auto industry saw after consecutive months of significant de-growth “signs of green shoots in PVs and two-wheelers.” SIAM has pointed out that “the sales numbers in the month of August would indicate if this is a sustainable demand and not just a pent-up demand.” Therefore, a possible GST cut on two-wheelers could be just the right thing to happen as the country gets into a festive mood. However, any adverse decision by the government could have a drastic impact on the auto industry. 

On August 25th, Nirmala Sitharaman, Union Minister of Finance and Corporate Affairs, said that the lowering of GST rates on two-wheelers “was indeed a good suggestion as this category is neither a luxury nor sin good and merits a rate revision.” 

While TURN OF SPEED has learnt that the matter is yet to be taken up by the Fitment Committee for recommendations following which it would be confirmed by GST Council, the move is much welcomed by the industry as they hope that the positive intent of the government is culminated into real action sooner. 

In a virtual media briefing on 41st GST Council on August 27th, Finance Minister did not comment on the said matter when asked by a Media person on how soon can the decision be made. 

Interestingly, the talks of GST cut had taken place in August 2019 as well, a period that was without COVID-19 pandemic. “In anticipation, all customers delayed their purchases which resulted in de-growth of 20% in PVs (passenger vehicles) and 13% overall,” tweeted Vinkesh Gulati, Vice President, Federation of Automobile Dealers Associations (FADA). He further went on to say, “Hope this time, the auto industry will be lucky.” 

“We welcome the fact that the government has changed the stance where they were bracketing all vehicles as ‘luxury’ and ‘sin’ to recognizing the auto industry as a ‘need’ and ‘not luxury’. It is a positive move but why the timing and why just two-wheelers,” asks Nikunj Sanghi, Chairman, Automotive Skill Development Council (Former FADA president).  He goes on to say that the announcement should not have been made in this manner as it could have a negative impact on the industry with potential buyers postponing vehicle purchases for now till the government’s final decision.

“We really do not know when it will go to Fitment Committee and then GST Council. If the GST cut happens then it is very good, even if it is only on two-wheelers, but if it is just a statement then it will be contrary,” says Sanghi.  

The auto industry has long been demanding reduction of GST rates to be reduced to 18% from 28% for the entire automobile sector, which over the last 18 months has seen the vehicle acquisition price upsurge due to BS-VI transition, introduction of new safety features, and increase in vehicle registration fees and road tax by a few states.  

“GST Reduction would be a key enabler in generating demand in the auto sector, and we are hopeful, that similar consideration could also be given for reduction of GST rates for commercial vehicles and passenger vehicles,” says Rajan Wadhera, President, Society of Indian Automobile Manufacturers (SIAM). 

In an earlier virtual press meet, Wadhera had pointed out on the sector being highly taxed with overall taxation going up to 60%. The auto industry contributes 8% to the country’s GDP and is the biggest organized job creator for the country. 

According to a report by ICICIdirect, “During the present post-Covid environment of reduced incomes and consequent propensity of spend, any reduction in upfront costs could provide further fillip to ongoing steady improvement in demand.” The report highlights that the final two-wheeler prices could go down by 8% provided the GST rate is brought down to 18% for the entire two-wheeler eco-system including components. “Lowering of tax on final product without a corresponding reduction in components used to manufacture would not really benefit end consumers,” reads the report, adding that the benefit may not get extended to premium motorcycles (150 cc and above). 

“In the era of social distancing, customers are looking for affordable personal mobility options and this reduction, if implemented, will make these options more accessible to them.  Lowering of GST rates will also help the entire ecosystem of manufacturers, auto ancillaries to dealers, supply chain partners and related vendors. We will await the next steps and hope this is done soon to give clarity to customers who are seeking to enter the market,” says, Sudarshan Venu, Joint Managing Director, TVS Motor Company. 

During the COVID-19 pandemic period, rural economy has been less impacted and experts believe that the government’s decision to lower GST rates on the category could be triggered by it. Even SIAM had highlighted on the growth witnessed in the rural market for two-wheelers, three-wheelers, small commercial vehicles and entry level PVs. The auto body had pointed out the growing entrepreneurship in the rural economy that is beating the trend.  

“With rural economy less impacted, a GST cut on two-wheelers can stimulate a price sensitive market with more competitive pricing. With faith in public transportation shaken, consumers will look to insure themselves with personal mobility options and two-wheelers could be a good place to start pump priming demand,” says V G Ramakrishnan, Founding Partner & MD, Avanteum Advisors LLP.

“In the semi urban towns rural areas, the public transport, local trains and buses that people use to travel to city centres for work have not yet started. In such a scenario, reduction of GST on two-wheelers has rationale but there is zero rationale on why to confine it to only two-wheelers and not cover three-wheelers and other commercial vehicles,” says Sanghi. 





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