GST rate cut likely for small cars, part makers

The clamour for lowering the goods and services tax (GST) rate for the auto industry, following the massive slowdown in the sector, may prompt the GST Council to announce a rate cut for automobile components and sub-four metre cars when it meets on September 20.

However, the tax break will be a short-term stimulus to boost demand, and the GST rate cut may be announced only for a limited period. The current rates may be automatically restored after about six months, two officials familiar with the discussions between the central and state governments said, requesting anonymity. This is because raising tax rates once it is reduced is a politically difficult call, the officials added.

The Centre is also considering giving some relief to other sectors, especially in the unorganized segment, but a tight fiscal position may not allow it to go for a liberal rate cut across industries, the officials said. It remains to be seen if cement and larger cars will get any tax relief.

Discussions are being held on whether to cut both GST rates and the cess on automobiles. Cars, bikes and mopeds at present attract a peak GST rate of 28% with additional cess ranging from 1% to 22%, depending on the length, engine size and type of the vehicle.

For example, the total tax incidence on sports utility vehicles (SUVs), large cars, and mid-sized cars, is 50%, 48%, and 45%, respectively.

However, reducing cess for the entire auto industry will be a challenge, as it will significantly affect revenue collection. The Centre uses the cess to compensate states for their revenue losses under the GST regime—a constitutional guarantee given to state governments for the first five years of its implementation. If collection falls, the Centre has to look for funds elsewhere to meet this obligation, said the second official cited above.

Other items attracting GST cess include tobacco products, pan masala and aerated drinks.

Though there is growing demand from the organized sector to reduce tax rates in order to boost demand, the GST Council is also trying to address the concerns of the unorganized sector, which is facing a major crisis.

The agenda for the meeting, however, will be finalized later. Union ministers will debate the proposals on the following day at the GST Council meeting.

According to MS Mani, partner, Deloitte India, while the auto sector certainly needs a rate reduction, fiscal constraints may lead to an evaluation of a phased reduction on certain categories of products in the sector. “The headroom for any rate reductions being limited, some of the reductions could be time-bound as well.”

A third official, who too spoke on the condition of anonymity, said although a GST rate cut may not be very impactful in reversing the slowdown, it could help lift business sentiment. The decision of the GST Council will be a political one, he added.

The move seems to be in line with Kerala finance minister Thomas Isaac’s tweet on September 1, where he pointed to the need for a centre-state coordinated fiscal stimulus.

India’s growth slowed to 5% in the three months ended June, a six-year low, putting pressure on the Narendra Modi government to explore every possible way to arrest the slowdown.