General Impact of New GST Rates
The new GST rates and slabs are designed to have a significant and positive impact on heavy industries by making products more affordable, stimulating demand, and simplifying the tax structure. The key changes include:
- Rate Rationalization: The old GST framework with multiple slabs (5%, 12%, 18%, 28%) has been simplified to a two-rate structure of 5% and 18%, with a special 40% rate for select luxury and sin goods.
- Boost to Demand: Lower GST rates, particularly on mass-market vehicles and machinery, are expected to reduce prices, thereby boosting consumer and industrial demand.
- Multiplier Effect on MSMEs: Increased sales will lead to a rise in orders for components from the ancillary industry (tyres, batteries, plastics, etc.), which is largely composed of Micro, Small, and Medium Enterprises (MSMEs). This will create a positive multiplier effect on the entire supply chain.
- Job Creation: The demand boost is anticipated to lead to new hiring in dealerships, transport services, logistics, and component manufacturing MSMEs. It will also benefit informal sector jobs like mechanics and drivers.
- Support for Financial Sector: A revival in vehicle sales, which are often credit-driven, will support retail loan growth and improve asset quality for banks and Non-Banking Financial Companies (NBFCs).
- Policy Certainty and Investment: The rational and predictable GST rates are expected to encourage fresh investments in the manufacturing sector and promote the “Make in India” initiative.
- Cleaner Mobility: The rate cuts on new vehicles will encourage the replacement of older, less fuel-efficient models, contributing to cleaner mobility and environmental benefits.
Impact on Specific Heavy Industries
1. Automobiles
The GST rate cuts in the automobile sector are widespread, covering a range of vehicle types and components.
- Two-Wheelers (Bikes up to 350cc): The GST rate has been reduced from 28% to 18%. This will make bikes more accessible for a large consumer base, including youth, professionals, and gig workers, particularly in rural and semi-urban areas where two-wheelers are the primary mode of transport.
- Small Cars: GST has been reduced from 28% to 18%. This applies to petrol cars with an engine capacity of <1200cc and a length not exceeding 4 meters, and diesel cars with an engine capacity of <1500cc and a length not exceeding 4 meters. This will make affordable cars cheaper, stimulating sales in smaller cities and towns and encouraging first-time buyers.
- Large Cars: GST has been reduced to a flat 40% with no cess. While the rate is still high, the removal of the additional cess, which previously took the effective tax rate to as high as 50%, makes taxation simple and predictable. It also ensures that these industries can fully utilize Input Tax Credit (ITC), which was previously limited to the 28% GST component and did not cover the cess.
- Buses (10+ seater): The GST rate has been reduced from 28% to 18%. This will lower the upfront cost of buses and minibuses, boosting demand from fleet operators, schools, and state transport undertakings. It will also lead to more affordable ticket fares and encourage the use of public transport.
- Commercial Goods Vehicles (Trucks, Vans): The GST has been reduced from 28% to 18%. This significant reduction in capital cost will lower freight rates, which will have a cascading effect across the economy, leading to cheaper movement of goods and a reduction in inflationary pressures. It directly benefits MSME truck owners and improves India’s export competitiveness by lowering logistics costs.
2. Tractors and Agricultural Machinery
The new rates will directly benefit the agriculture sector, which is crucial for the Indian economy.
- Tractors (<1800cc): GST has been reduced from 12% to 5%.
- Road Tractors (>1800cc): GST has been reduced from 28% to 18%.
- Tractor Parts: GST has been reduced to 5%.
These rate cuts will make tractors more affordable, increasing mechanization in the agriculture sector and improving crop productivity. It also benefits ancillary MSMEs that manufacture components like tyres, engines, and hydraulic pumps, and strengthens India’s position as a global tractor manufacturing hub.
3. Auto Components
- GST on the majority of auto components used for the manufacture of motorcars and motorbikes has been reduced to a uniform 18%. This standardization simplifies the tax structure and helps address classification disputes.
4. Transport Services
- Services related to the transport of goods and passengers by road have also been rationalized. They are now given the option of two rates: 5% or 18%, allowing businesses to choose the rate that best suits their needs and business model. ITC has also been passed on to avoid the cascading effect of taxes.