GST will disrupt auto sector’s sales, pricing: Deutsche Bank
OEMs and auto dealers remain focused on minimizing inventory, as certain existing taxes would not be eligible for offset under GST, says Deutsche Bank
Mumbai: India’s new goods and services tax (GST) is set to disrupt the sale and pricing of automobiles and ancillaries as companies offer discounts to run down inventories before the rollout of one of Prime Minister Narendra Modi’s biggest tax reforms, according to Deutsche Bank AG.
The new nationwide sales tax, that comes into effect on 1 July, will combine more than a dozen levies, creating a uniform market across India for the first time.
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The changes mean that companies won’t be able to get credit for certain existing levies, including the so-called value added tax (VAT), once GST is introduced, Mumbai-based analyst Amyn Pirani wrote in a report on Thursday. That could lead to losses of as much as 7% on unsold inventory as of 30 June, he wrote.
“Original equipment manufacturers and dealers remain focused on minimizing inventory, as certain existing taxes would not be eligible for offset under GST,” Deutsche Bank’s Pirani wrote. “While this was largely expected, we believe that the final impact—particularly on pricing—may negatively surprise the market.”
The disruption comes at a time when the automobile industry is recovering from the impact of demonetisation that hurt consumer spending. The sector is also gearing up to face increased competition as foreign companies including Fiat Chrysler Automobiles NV and PSA Group enter a market pegged to be the world’s third largest by 2020.
“Price corrections have been significant” for two-wheelers, with Bajaj Auto Ltd, Hero MotoCorp Ltd and TVS Motor Co. Ltd cutting prices or offering incentives, according to the Deutsche Bank report. Discounts increased in June by as much as three percentage points for the passenger vehicle segment, where wholesale volumes will probably be flat to marginally negative this month, Pirani wrote.
Deutsche expects sales of medium and heavy commercial vehicles to continue in drop after volumes sank 43% in April-May from a year earlier. Sale of parts like tires and batteries will also be hit.