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How GST will affect the Indian Car Industry...

21 October 2016, 12:14 PM

Multiple taxation laws, numerous interpretations and the discretion at the disposal of the authorities have caused multiple roadblocks on the way to ensuring a smooth & easy climate for trade & commerce. Stakeholders have been known to refer to the business climate in the country as multiple entities bound together by a common currency. The much-delayed Goods & Service Tax (GST) which has faced countless hurdles from state governments, recently got green-flagged in the Rajya Sabha, thereby paving the decks for a pan-national single market economy.

The impact of GST on the Indian car market is going to be manifold, as it cuts through hurdles across critical functional areas such as Sales & Marketing, Logistics, and Taxation, among others. Apart from auto manufacturers themselves, it is their support system that is the Tier 1, 2 & 3 component vendors who shall benefit significantly in the form of a more conducive trading environment.

Currently there are multiple direct & indirect taxes, including Excise & VAT (Value Added Taxes) being levied at various stages of the manufacturing & sales process in the case of automobiles. Moreover, each state has its own taxation levels & the rules governing them. A uniform goods & service tax on automobiles would, in principle, mean an end to the wide variance in prices across the length & breadth of the country for any given automobile.

How does GST affect the auto sector would eventually depend upon three crucial factors, first of which would be the taxation rate as ratified by the central government. This rate, which is yet to be confirmed, would necessarily have to be high enough to compensate the removal of state level taxation under GST. Estimates therefore put the final rate to be levied, to be somewhere in the range of 20-24%.

Secondly, the automotive sector isn’t just concerned with the final product, but is a closely wound network of suppliers & vendors who put together the multiple ‘parts modules’ that eventually make up an automobile. Thus, even though the goods & service tax is expected to result in lowering of prices for automobiles at the retail level, it would all depend upon how the impact on input costs, and the degree of increase (or decrease).

Manufacturers could also want to shore up their revenues, after having suffered under the previous taxation framework. This could very well be the case at the economy end of the market, where manufacturers have been operating on razor thin margins, and would now want to refill their war-chest for the next round. Another level of impact could be felt at the segment levels, where, for example, luxury auto manufacturers would not want to drop prices beyond a particular level citing dilution of brand equity. Consequently, one may not see the necessary reduction in pricing at the retail level, and some industry sources are saying, that prices in-fact, could even go up, after factoring in inflation rates. The best way to play this then would be to wait for time to reveal everything in its intricate detail.

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