GST bonanza: SUVs, small cars get cheaper; relief for premium car segment

The cost of sports utility vehicles (SUVs) is expected to come down by more than Rs 1.5 lakh once the Goods and Services Tax (GST) reforms announced by Union Finance Minister Nirmala Sitharaman kick in on September 22.

Though SUVs move from the current GST slab of 28 per cent to a higher slab of 40 per cent, the effective tax impact will lead to a price reduction since the compensation cess will cease to exist.

Except in the case of tobacco products such as cigarettes and gutka, the compensation cess will not be levied after September 22. This makes large cars also attractive in terms of price after the proposed changes are implemented from Navratri, which usually marks the beginning of the busy consumption season leading to Deepawali.

Also read: PM Modi hails GST reforms as ‘double dose’ of support and growth

Prices slashed by 6.6 pc

The price reduction in the case of SUVs is estimated to be roughly around 6.6 per cent on account of the GST rejig first indicated by Prime Minister Narendra Modi in his Red Fort speech on August 15.

Incidence of GST in the case of SUVs will be around Rs 6.6 lakh in the new GST regime compared to Rs 8.1 lakh in the current regime that includes compensation cess of 22 per cent, according to estimates by auto industry experts.

SUVs have been defined for GST purposes as vehicles having a length of more than 4000 mm, and this segment happens to be among those in high demand during recent years.

Small is more attractive

In the case of small cars in the price range of around Rs 11-12 lakh, the price impact due to the shift from a 28 per cent tax slab to an 18 per cent tax slab is expected to result in these vehicles becoming cheaper by Rs 1 lakh.

Also read: GST 2.0: Historic reform or delayed fix? Political, economic angles decoded

Prices will go down by around 8.5 per cent in the case of small cars, according to estimates by industry experts. Depending on the model, prices of a particular car may vary significantly, with the base model selling cheaper by more than Rs 1 lakh than its high-end variant.

Small and medium-sized cars continue to garner a significant portion of the market despite the growing craze for SUVs and large cars.

In the current GST regime, tax on small cars is around Rs 2.5 lakh for a car costing Rs 11-12 lakh. The compensation cess in the case of small cars was only one per cent, and most of the price reduction comes from the lower GST slab of 18 per cent.

7.8 pc impact on two-wheelers

In the case of two-wheelers up to 350-cc engine capacity, the GST impact gets even better with the price for the consumer going down by nearly 11 per cent, according to auto industry veterans.

Also read: GST reform | Some gains will be offset by US tariffs: Gaura Sen Gupta

The price of a bike, currently priced at around Rs 1.4 lakh, is expected to go down by Rs 11,000 when the new GST rates come into play. The estimated reduction in price from September 22 is around 7.8 per cent as the GST incidence comes down from 28 per cent to 18 per cent.

However, in the case of two-wheelers with an engine capacity of more than 350 cc, prices are expected to go up in the new GST regime.

Compared to 28 per cent GST and three per cent compensation cess, premium two-wheelers are subject to 40 per cent GST from September 22. There are various estimates about the price impact due to higher GST, since this is a niche segment with top players having the capacity to partially absorb some of the enhanced tax burden.

Components of gain

The auto industry is also expected to gain on account of a uniform 18 per cent GST on parts and components, leading to further scope for price reduction. However, gains to customers will be ultimately guided by the level of competition and willingness to pass on the GST relief.

Also read: Why new GST rates are a shot in the arm for auto industry

Since the Union government is under pressure to ensure that corporates do not gobble up windfall gains, every industry benefiting from GST cuts is likely to be under scrutiny. Since awareness about the GST reduction is high, consumers may also scrutinise price changes more carefully.

Simplification of procedures is also expected to boost the auto industry, and this includes automated processing of refunds that will be system-driven. Compliance costs are also expected to go down, as in the case of many other industries.

Hydrogen fuel cell vehicles gain

The budding electric vehicles (EV) industry has also found relief since there were apprehensions about concessional GST rates partially going away. While GST on EVs remains at five per cent, the other "green" player — hydrogen fuel cell vehicles — has been encouraged with a tax cut. The GST on hydrogen fuel cell vehicles has been cut to five per cent as compared to the current level of 12 per cent to boost this environment-friendly segment.

Also read: Why the mere drop in GST on cement may not bring relief to homebuyers

The abolition of the compensation cess has come as a major boost to the premium car segment, while the automobile industry has also become a major gainer due to the GST reduction.

Eight states, including Tamil Nadu, had demanded a new cess to compensate the states for the loss of revenue due to GST cuts. However, this demand was not accepted at the GST Council, with the Union government explaining that the current GST law does not permit any levy on top of the 40 per cent GST slab.