A potential GST rate cut on automobiles is on the horizon, a move that could significantly reshape India’s auto sector and provide a major boost to consumer demand. According to a Nomura analysis, this policy change could have a game-changing effect, with a ripple effect across the entire industry.
Here’s a breakdown of what the proposed GST cut could mean for the auto sector.
A New Tax Structure and Lower Prices
Reports suggest the government is considering a GST rationalization for vehicles. Currently, most cars and two-wheelers fall into the highest GST slab of 28%, with large cars attracting an even higher total tax of 43-50% due to additional cess.
The proposed change would likely see:
- Small cars and two-wheelers shift to a new 18% GST rate.
- Larger cars fall under a new, lower total tax burden of around 40%.
- High-end motorcycles (above 350cc) could see a tax increase from 31% to 40%.
This tax reduction is expected to translate directly into lower on-road prices for consumers. For instance, popular models like the WagonR could see a price drop of about 9%, the Bolero by 10%, and the XUV700 by 7%. Even models like the Brezza and Creta could become around 3% cheaper.
Boosting Demand and Margins
Nomura estimates that these price cuts could have a multiplier effect of 1–1.5x, leading to a substantial 5–10% increase in vehicle demand across segments. This demand surge would be a significant gain for auto manufacturers, with potential for 100-150 basis points of margin improvement.
- Passenger Vehicle Leaders: Companies like Maruti Suzuki and Mahindra & Mahindra (M&M), with a high proportion of their sales in the small car and LCV segments, are poised to be the biggest winners.
- Two-Wheeler Market: While two-wheelers would also benefit, the gains for manufacturers may be partially offset by rising costs from upcoming safety mandates, such as the ABS requirement. However, Eicher Motors, with its Royal Enfield portfolio already being largely ABS-compliant, may see a relative advantage.
Impact on Auto Suppliers and EVs
The positive effects would extend beyond vehicle manufacturers to auto component suppliers like Uno Minda, Samvardhana Motherson, and Sansera Engineering. The increase in vehicle sales would lead to higher volumes and improved order books, strengthening their pricing power.
However, not all segments will benefit equally. A GST reduction on Internal Combustion Engine (ICE) vehicles could create a new challenge for the electric vehicle (EV) market. With EVs already at a low 5% GST rate, making ICE cars cheaper would widen the price gap, potentially delaying EV adoption in India by 2-3 years unless the government introduces separate demand incentives for EVs.
Fiscal Implications for the Government
While a GST cut would provide a major boost to the auto sector, it comes with a fiscal cost. The government could face a substantial annual revenue loss of approximately ₹74,000 crore. However, a 10% increase in vehicle volumes could partially mitigate this, reducing the net impact to around ₹54,000 crore.