Evaluating the impact of GST rate changes on Indian automakers: An investor's perspective

New Delhi: The upcoming goods and services tax (GST) reduction is expected to drive long-term auto demand and job creation in India, HSBC Global Investment Research said on Monday.

The government is considering simplifying the GST slabs, with the 28 per cent rate potentially being reduced to 18 per cent, and the cess imposed on top of GST rates for automobiles may be discontinued.

Passenger vehicles (PVs) generate $14-15 billion in GST collection, while two-wheelers contribute $5 billion.

"The specifics are unknown so far, hence we look at various scenarios and highlight company-level exposure to various GST rates and a framework for investors to evaluate the relative benefit across OEMs," the report said.

Currently, in PVs, the GST ranges from 29 per cent to 50 per cent, as a cess is imposed on top of GST based on vehicle size (cc and length). Under the proposed regime, the government may reduce the tax on smaller cars to 18 per cent (from 28 per cent) and move bigger cars to a "special rate" of 40 per cent, while cancelling the cess on top of GST, the report suggested.

This could lower prices for smaller cars by 8 per cent and for bigger cars in the range of 3-5 per cent.

"In this scenario, OEMs like Maruti Suzuki India Ltd (MSIL) would be a key beneficiary due to higher exposure to small cars (68 per cent volumes in 28 per cent category). For MBM, the proposed GST reduction is a tailwind as well, though it is at a relative disadvantage due to higher exposure to EVs," the report maintained.

A flat reduction from 28 per cent to 18 per cent across all car sizes, with everything else remaining the same, would create a simplified regime. However, a less likely scenario involves reducing the basic GST from 28 per cent to 18 per cent while keeping the cess on cars based on size unchanged.

"In this scenario, all vehicles across categories benefit with around a 6-8 per cent reduction in price. A flat 10 per cent cut would mean the government absorbs a revenue hit of around $5-6 billion," the report noted.

A flat reduction from 28 per cent to 18 per cent across all car sizes, along with discontinuation of the cess, would significantly simplify the tax structure, though it is considered very unlikely due to the significant impact on government revenue (around half of GST revenues would be affected).

IANS inputs