The Impact Of GST On Car Prices In India

Founded on the concept of ‘One nation, one market, one tax’, the Goods and Services Tax (GST) is termed as a potential game changer and is said to be the most ambitious reform in decades. It is expected to transform the world’s fastest growing major economy into a single market for the first time.

All state and central taxes like VAT, CST, infra cess, calamity duty (NCCD), and excise will all be replaced by GST. Also, octroi/entry tax which is applicable in certain states will be abolished as GST is a destination based tax.

How Has This Affected The Auto Industry?

GST has been kind to the auto industry. Although service charges on insurance and loans, has gone up under the new tax regime, overall, it looks like the cost of cars has come down.

Additional Reading: Flights Are Now Cheaper, Thanks To GST!

Due to this unified tax structure, car makers will charge a uniform price across the country. Thus the ex-showroom price of vehicles across the country will be the same. However, GST does not subsume taxes, such as road tax, which varies across states ranging from 3 percent to 24 percent. In fact, states like Maharashtra will be hiking road tax (as per recent news reports) to make up for the loss in revenue from octroi and Local Body Tax (LBT). Thus, the on-road price across the country will not be the same.

Unlike the present scenario where excise, infra cess and calamity duty are imposed on the ex-factory price and VAT on the retail price, GST will be imposed only on the ex-factory price of the car.

On a different but related note, auto spares and services will, to an extent, be impacted by GST as the tax rate on spare parts, which is 12% as per the old structure, will go up to 28% after the implementation of GST. So, overall GST rates are likely to raise prices of the spare parts of cars.

Additional Reading: GST: Expensive Or Cheap?

What Is The Impact On Different Categories Of Cars?

Source- Autocar India

Under GST, there will be four main vehicle categories:

• Small cars
• Large cars
• Electric vehicles
• Hybrid vehicles

Most vehicles will fall under the standard 28 percent slab with an additional variable cess. And across the spectrum, we have witnessed a drop in tax, ranging from 2.25 percent to 12 percent, depending on the category. Hybrid vehicles have borne the brunt as they attract the same amount of tax as a large car. Electric vehicles, on the other hand, fall in the lowest tax band. Hopefully, this should translate into more electric cars on the road in sync with the government’s intent.

(This could be a sign for Tesla to finally enter the Indian market!)

Pre GST, the cost break-up of SUVs consisted of two separate duties based on ground clearance, body length, and engine capacity. Now, there is no separate category for SUVs in the GST scenario.

Despite this, it’s yet to be seen if car manufacturers will pass on the entire benefit to the end users.

A Glance At The Initial GST Effect On Car Prices  (Manufacturer wise)

Car manufacturer wise price changes

Source- FinancialExpress

All prices above are indicative and ex-showroom, Delhi, and should give a fair idea of what a consumer can expect in terms of reduction.

Other car makers like Ford have also followed suit and reduced prices up to 4.5 percent to pass on GST relief to buyers.  The highest cut in its flagship SUV – Endeavour becoming cheaper by up to Rs. 3 lakhs. Honda, too, has brought down its prices by up to Rs 1.31 lakhs.

Besides low prices in the immediate future for most vehicles, GST is also expected to bring in a more transparent taxation structure.  With such price cuts, the automobile industry hopes to further boost consumer demand in the coming months.

Additional Reading: A Quick Guide To GST Rates

Impact Of GST On The Overall Automobile Industry Landscape

Hatchbacks and compact cars

Hatchbacks and compacts (also termed as ‘small cars’) in the price range of Rs. 5 to 8 lakhs, account for almost three fourth of the car market. A majority of this segment has, however, seen minimal impact from GST, thus allaying the fears of car makers in this price-sensitive segment. On the consumer front, with the mid-sized sedans and SUVs getting price benefits, schemes and offers are expected to move to smaller cars to ensure that demand is sustained.

The luxury segment

Luxury sedans (mid-sized) and SUVs which belong to the aspirational segment have received a boost, the difference in tax rates being as much as 10 percent in some cases. The luxury market in India contributes to just 1 percent of the overall passenger vehicle market in terms of units brought. This number is significantly behind countries like Indonesia (2.5 percent) and Malaysia (5.4 percent).

Sports Utility Vehicles (SUVs)

A drop in rates coupled with increasing income levels will lead to bigger vehicles becoming more affordable in the future and demand for this is expected to increase. Various market experts predict the industry will break into the double digit territory. The SUV will now provide a real alternative and further impetus to the automobile sector. With the implantation of GST in the luxury segment, we should hopefully see more investments from dealer networks and parent companies.

Hybrid cars

With respect to this segment, what has stumped many is that hybrid cars could have offered differentiation for the executive segment. However, thanks to the current rates it has become unsustainable. This might result in various car makers deciding to phase them out. That being said, more market research needs to be done by the manufacturer to check if consumers will be willing to pay the hybrid premium. Currently, almost 5 percent of the sales volume for Maruti and 4 percent for Mahindra are contributed by mild hybrid vehicles.

All in all- time for new car buyers to make the most of this ‘Good and Simple Tax’!