The expectation is that the GST would be set at 26% for the auto sector, which in theory should reduce the prices of luxury cars that at present attract as much as 52% in taxes under various heads.
At the time of the year when sales usually peak, these companies are dealing with a large number of prospective customers who are postponing their buying decision.
MUMBAI: There isn’t much to celebrate for luxury car companies this festive season.
At the time of the year when sales usually peak, these companies are dealing with a large number of prospective customers who are postponing their buying decision. The reason: continuing uncertainty over the rate of goods and services tax.
Many industry executives are now pruning their sales estimates, which widely were for double-digit expansion this year.
Discussions on fixing the tax rates remain inconclusive with the GST Council set to meet again in the first half of November. The expectation is that the GST would be set at 26% for the auto sector, which in theory should reduce the prices of luxury cars that at present attract as much as 52% in taxes under various heads.
But the uniform rate is likely to come with a caveat: there are proposals to impose a cess on luxury goods to the extent that the new indirect tax system doesn’t hurt government revenue — that would mean no change in the price that the buyer pays. People are delaying their buying decision until they have clarity on the levies, said industry insiders.
An executive at a super-luxury car company said many potential customers had declared unaccounted cash under the government’s recently closed income declaration scheme (IDS), and don’t have the money to splurge now, or are cautious on spending. Many others are avoiding big-ticket purchases to stay off the taxman’s scanner, he added.
For makers of luxury cars and SUVs, these developments mean slow sales this Diwali season, and come as a double whammy. A Supreme Court ban on the registration of large diesel vehicles in the National Capital Region had already hurt their sales in the first half of 2016 — that ban has now been lifted, with the court imposing a levy on such vehicles.
Enquiries from prospective buyers are still high, but their conversion into sales is taking much longer, said Roland Folger, managing director of Mercedes-Benz India. “There are lot of uncertainties regarding the future of diesel as a fuel in luxury cars and the impending GST tax structure, so one expects the growth forecast for Q4 to be slightly lower with customers deferring purchase,” Folger told ET.
In the first nine months of 2016, the luxury car market is estimated to have expanded 3-5% to about 26,000-28,000 units, largely driven by double-digit growth at BMW, Jaguar Land Rover and Volvo which were aided by new launches.
The top two, Mercedes-Benz and Audi, have posted flattish to low single-digit growth. In 2015, sales in the luxury segment totalled 36,000-37,000 units. Rohit Suri, president of JLR India, said he was expecting the market to grow in double digits, but now fears purchase deferrals on account of GST uncertainties in coming months to pull down the growth rate to a single digit.
It isn’t unusual for consumers to wait and watch when they expect major changes in taxes, especially when it comes to the purchase of big-ticket items such as luxury cars, said Gaurav Vangaal, senior analyst at IHS Markit Automotive. But the problem this time is that it is happening at the peak festival time.
The festive season typically accounts for 30% of annual car sales, as many Hindus believe it is auspicious to acquire assets at the time.
Companies chip in by launching new models and making attractive offers to entice buyers. The macro environment, too, is seen favourable this year, with low interest rates and stable fuel prices, as well as more money in the hands of government employees due to a recent salary revision. These factors are indeed helping mainstream car companies, but for those selling luxury vehicles, the benefits are offset by the indecisiveness over the GST rate.
“There are market uncertainties currently and (that) are attributed to the recent diesel ban and GST speculation,” said Tom von Bonsdorff, managing director at Volvo Auto India. But Volvo is on track to post 15-20% growth this year, he said, thanks to the availability of sub-2 litre diesel options across the range — the court ban in NCR was on diesel cars and SUVs displacing 2 litre and more. But if not for the uncertainties, conversion of enquiries to sales could have been even faster, von Bonsdorff added.
Industry players are now hoping that the final tax rate doesn’t create any major roadblock to the demand situation.