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Ahead of the GST Council meeting on September 20, GST rate cuts for automobiles have virtually been ruled out. Lacklustre GST as well as the lower compensation cess collections this year do not give much fiscal room for rate cuts or alterations in the compensation cess, leaving the call to be entirely political.
Opposing views
The arguments against giving concessions to the auto industry are well-known. According to estimates available in the public domain, auto sales bring in Rs 50,000-60,000 crore to the total GST kitty. Hence, across-the-board rate cuts for different segments of the auto industry, from 28 per cent to 18 per cent, may be too costly for the exchequer. Besides, a heady mix of cyclical and structural issues also affect auto sales.
Apart from the cyclical downturn, the ongoing slowdown in the auto space can be attributed to regulatory issues (BS VI transition), financing issues (NBFC crisis), a rise in transaction costs (hike in third party-premiums, for instance) as well as the lower turnaround time for trucks after GST and higher axle load norms, permitting existing trucks to carry more load.
There has been no significant pick-up in sales despite the discounts that are currently being offered and, hence, it is unclear if sales would go up even if GST rates /cess were reduced.
The industry’s argument is that excise duty cuts have always been resorted to in the past when there has been a slowdown in auto sales, to boost sentiment. The interim Budget of 2014, for instance, granted excise duty cuts and the July 2014 Budget extended the duty cuts until December 2014, to perk up auto sales.
Limited concessions
While these views are at both extremes, doling out a limited concession may be a good midway solution, if the government chooses to take a political call in the upcoming GST Council meet. For one, with sale of only BS VI vehicles allowed from April 1, 2020, GST concessions could probably be extended to BS IV vehicles alone until March 31, 2020. This could be a win-win for all stakeholders. For the government, it would not be a significant revenue loss.
Given that vehicle manufacturers have to manage their BS IV inventory such that they don’t have much on hand as on March 31, 2020, production of BS IV vehicles in the coming months is likely to be limited.
For auto makers, a GST concession at this point will help in further liquidating the BS IV inventory currently with the dealers. For customers who have been sitting on the fence despite the discounts already being offered, this could tempt them to bite the bullet. This move will also be in sync with the stimulus package announced earlier, which seeks to improve short-term demand by doubling depreciation rates to 30 per cent for vehicles bought until March 31, 2020.
Other limited concessions to nudge the aam aadmi, such as reduction in rates/ cess for select segments such as commuter bikes (bikes with engine capacity of 75-110 cc) and small cars ( sub 4-metre cars) alone could also be considered.
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