100 days of GST: Smooth ride ahead as auto firms swiftly align to new tax regime
In spite of the flip-flop in tax rates for automobiles, the sector has been quick to change lanes and adapt to the new goods and services tax (GST). Strong demand, proactive vendor and dealer network along with a well-oiled logistics system have minimized the impact of transition to the new tax system.
Indeed, vehicle prices have been increased after GST. But, the compact segment that accounts for nearly half the car sales in the country suffered the least impact. Data from Society of Indian Automobile Manufacturers shows a 12% growth in domestic car sales, with a stronger 20% growth in utility vehicles (UVs). However, after the government tinkered with the “cess”, UVs, that had become cheaper after GST, have now turned more expensive.
Revised rates since the September notification have pegged GST along with cess for luxury vehicles at 45-50%. The price hikes thereof are nearly 4-7% and could dent sales, after the festive season euphoria fades off.
Obviously, companies like Mahindra and Mahindra Ltd that has a significant share of UVs in its portfolio would bear the brunt. Maruti Suzuki India Ltd is the least affected as seen in its sales that continued to beat industry growth rates.
Two-wheeler prices too were hardly affected and sales continues to grow in double- digits for major companies like Honda Motorcycle and Scooter India Pvt. Ltd, Hero MotoCorp Ltd, Bajaj Auto Ltd and TVS Motor Co. Ltd. Fortunately, GST brought some relief to commercial vehicles as rates were slightly lower than the pre-GST regime. But then, GST was preceded by compliance with new BS-IV emission standards due to which customers deferred sales. However, since July, sales growth is improving although the long-term trend will hinge on economic revival.
Meanwhile, other factors like lower auto finance rates, and the fading impact of demonetization and emission norms will support auto sales ahead.
However, dealers may be hit harder than customers. Cost of compliance may increase as documentation and supply chain records are mandatory to earn the benefits of input tax credit under GST. A report by India Ratings and Research says that working capital outlay for dealers will increase due to payment of GST on free service, booking advances from the customer and inter-state transfer of inventory. Credit on input taxes already incurred through the supply chain will be adjusted at a later date.
A huge advantage is that GST will weed out the unorganized sector in the replacement market. Organized battery firms like Exide Industries Ltd and Amara Raja Batteries Ltd along with tyre firms would be big beneficiaries.
To sum up, the switch to GST is unlikely to impact sales or production operations for the automobile sector.