Small Cars May See 8% Price Reduction if GST Rate is Cut: HSBC Report

A report by HSBC suggests that if the GST rate on small cars is reduced from 28% to 18%, prices could decrease by 8%. The report also proposes a special rate of 40% for larger cars and suggests that all two-wheeler makers would benefit from a GST reduction. However, the government could face a revenue loss of $4-5 billion in this scenario.

India's government is poised to announce significant tax reforms that could significantly impact the automobile sector. The Goods and Services Tax (GST) on small cars is set to be reduced from 28% to 18%, as part of a broader GST rate rationalization. This move, expected to be announced during Diwali, aims to boost sales and stimulate the economy [1].

The proposed tax cuts, part of Prime Minister Narendra Modi's program of tax cuts, are anticipated to boost sales of small cars, which have seen a decline in recent years. Small cars, defined as those with an engine capacity below 1200cc for petrol vehicles and 1500cc for diesel, and not exceeding 4 meters in length, have been losing market share to SUVs [1].

The GST reduction is expected to lower prices by approximately 8%, according to a report by HSBC. This reduction could be particularly beneficial for manufacturers like Maruti Suzuki, whose market share has declined due to the high GST rates. Other major automakers, including Hyundai Motor India and Tata Motors, are also likely to benefit [1].

Additionally, the government is considering a special rate of 40% for larger cars, which could help maintain the overall tax incidence for bigger vehicles at around 43%-50%. This move is part of a broader plan to simplify the GST structure, moving from a four-slab system (5%, 12%, 18%, and 28%) to a two-slab system (5% and 18%), with a special rate for demerit goods [1][2][3].

However, the government may face a revenue loss of $4-5 billion if these GST cuts are implemented. The impact on the overall economy and the government's revenue streams will need to be carefully monitored [1].

The proposed changes are expected to be discussed and finalized by the GST Council, which is chaired by the federal finance minister and includes representatives from all states. The council will meet to consider the Centre's proposal, which aims to reduce the tax burden on the middle class, MSMEs, and the farm sector [3].

In conclusion, the proposed GST rate revisions are aimed at boosting the automobile sector and stimulating economic growth. However, the government will need to balance the potential benefits with the expected revenue loss. The final decision on the GST rates will be made by the GST Council, and the changes are expected to be implemented in the coming months.

References:
[1] https://www.telegraphindia.com/business/centre-proposes-gst-cut-on-small-cars-insurance-premiums-in-major-revamp/cid/2118458
[2] https://www.moneycontrol.com/automobile/diwali-gift-for-auto-sector-govt-likely-to-reduce-gst-on-cars-two-wheelers-from-28-to-18-article-13460762.html
[3] https://economictimes.indiatimes.com/news/economy/policy/gst-rate-rejig-sitharaman-to-address-aug-20-gom-meet-to-put-forth-centres-rate-cut-proposal/articleshow/123360712.cms