India’s automobile sector is expected to reap immense benefits under the GST (Goods and Services Tax) which is expected to lower taxes and stimulate demand, equity research firm Jefferies India has said.
The research firm in its report — “Autos and GST – Benefits All Around” dated August 18, 2016 said: “The entire auto sector pays taxes significantly in excess of average
and will benefit significantly under GST. We do not agree with current assessment that some companies benefit more than others – the benefits are largely similar.”
“The benefits, obviously, a lot depends on the rates. However, at current proposed rates, prices of all vehicles, with the exception of tractors, would fall 7-10% (we assume all benefits would be passed on).”
According to the firm, lower cost due reduction in tax rates has the potential to stimulate demand in the medium term.
“However, in the short-term, (confused) expectations of large price cuts could actually result in a slump in demand and massive discounting across all segments in run up to the actual implementation,” the research firm said in its report.
“Markets are likely to see through the short-term pain. Several companies either operate in tax exempt zones or produce in states with lower CST (Haryana). To that extent, there could be some margin hit but that’s minor compared to the larger picture.”
Currently, the auto industry is one of the most highly taxed sectors.
In addition, owing to the long, complex supply chain, there exists a cascading effect of taxes and tax costs associated with inter-state transactions.
“Implementation of GST, even with no change in rates, will result in significant savings. At current proposed rates (12% merit, 18% std, 40% luxury cars), most segments will likely see a price reduction of 7-10%. Mid sized cars could see more,” the report added.
The government has set an April 1, 2017 target for implementing the GST regime. However, GST will become a reality only after 50 per cent of the states ratify the constitutional amendment bill.
The Parliament on August 8 had given its nod to the constitutional amendment bill on GST which is touted as the most radical indirect tax reform since Independence.
The new tax regime — the idea for which was mooted in 2003 — seeks to subsume all central indirect levies like excise duty, countervailing duty and service tax, as also state taxes such as value added tax, entry tax and luxury tax, to create a single, pan-India market.