There is an atmosphere of policy uncertainty in auto sector, with the government, first lowering and then increasing the effective tax on big vehicles under GST. Though yet to be implement (since the Central Government will have to move legislative amendments to make this change effective), automakers feel the need of a long-term policy roadmap for the industry.
When GST rates for automotive industry were first out in May this year, manufacturers of big vehicles (having engine size more than 1,500cc) cheered it as the effective tax (including cess) was about 10% lower than the pre-GST regime. While these vehicles attracted rates of 53% earlier, they were taxed at 43% (28% GST plus 15% cess) by the GST Council. Accordingly manufacturers of big cars announced reduction in prices ranging from Rs 75,000 to Rs 3.5 lakhs.
This was a booster dose for the luxury car market, which had witnessed dismal performance in 2016 with 2% decline in sales of cars. After the new initial GST rates were announced, luxury carmakers such as Mercedes-Benz, Audi and BMW had forecast double-digit growth in 2017.
All this optimism was short-lived, as GST Council in the first week of August decided to raise the cess charged on large cars and utility vehicles by 10%, taking the total tax to 53% (28% GST plus 25% cess). This has created a sense of uncertainty among the carmakers some even claiming that it will impact production and jobs.
"We are highly disappointed with the decision. We believe this will be a strong deterrent to the growth of luxury cars in this country. As a leading luxury car maker, this will also affect our future plans of expansion under 'Make in India' initiative, which aims at making and selling world-class products in India, with the latest technology for end consumers. We feel deprived as the leading manufacturer of luxury cars in India, who has been championing ‘Make in India’. This decision will also reverse the positive momentum that the industry wanted to achieve with the introduction of GST,” opines Roland Folger, MD & CEO, Mercedes-Benz India.
Increase in cess a roadblock
The new amendment in the GST rates has thrown a spanner to carmakers’ expansion and pricing strategy and has affected their long-term planning. Some, who were looking at the possibility local manufacturing and increasing their deals network, have decided to put on hold these plans. The luxury cars market was bracing for double digit growth in the first half of 2017 with experts anticipating sales of 40,000 units (up by 12.6% from 35,500 units in 2016). With the new GST rates, the market is expected to hit a speed breaker and even deceleration.
“With this hike in cess, we expect the volumes of the luxury industry to decelerate, thus offsetting any growth in the potential revenue generation that could have come with the estimated volume growth,” adds Folger.
Auto industry is also perplexed at the short duration taken to reverse the decision. Carmakers are of the opinion that the government should have waited for more time before deciding to raise the cess.
Folger explains, “One of the original benefits expected out of GST was rationalisation of tax rates. Luxury cars and SUVs are one of the segments that long required tax rationalisation, as this segment remains highly taxed. Further, in the pre-GST regime, the taxes to the final customer were varying widely from state to state depending on the VAT applicable in respective states. Also, one month is too short a period to consider an upward revision in rates. The market performance should have been watched for at least 6 months, before it was relooked. The current proposal of increase in cess clubbed with the increased road tax rates, will take the effective consumer price much above the pre GST scenario level.”
To implement the new GST rates, the Central Government will have to move legislative amendments requiring Parliaments nod. If these amendments go through, then the industry fears that it will lead to decline in sales of big cars and will have a negative impact on the growth of auto industry as well.
“Yes there will be an adverse impact on the demand for larger cars and SUVs as it will increase the cost significantly. Overall, this will be detrimental for the industry. Many OEMs planned to introduce global models to the country but now it seems unlikely,” states Dr Wilfried Aulbur, Managing Partner, Roland Berger Strategy Consultants India.
Need for a long-term policy
More than increase in tax rates, the industry is worried about the policy uncertainty. In the last year & a half, Indian auto industry has faced headwinds on the policy front with issues such as addition 1% green cess on diesel vehicles; clearance of Bharat Stage III vehicle inventory and increased GST rate on hybrid vehicles. In addition, the industry will have the grapple with impending challenge of leapfrogging to BS VI emission norms from BS-IV in a period of four years, by skipping an intervening BS V stage. Against this background, industry expects the government to bring in coherence in policy making and reduce barriers to growth.
"This decision (hiking cess from 15% to 25%) once again reiterates the need for a long-term roadmap for the luxury car industry, which has been at the receiving end of arbitrary policies. The constant shift in policy makes our long-term planning for the market highly risky, and we think this would only have an adverse impact on the country's financial ratings. By making better technology more expensive, the Government is causing more damage to the environment and slowing down the overall growth pace of the country's economic growth, which it is striving to achieve,” says Folger.
Hybrids left high and dry
Another segment that has also been affected by the policy uncertainty is hybrid vehicles, which have been taxed higher in GST regime at 43% making them more expensive. Given the government’s commitment to lower carbon emission and to encourage usage of electric vehicles, auto industry was expecting some incentive to hydrids (considered to be a bridge for transition from internal combustion engine to electrical vehicle). In fact, many auto OEMs and their suppliers were working on hybrid models for India. With increase in effective tax rates, all these companies will have to go back to drawing board and re-draw their future plans.
Dr Aulbur explains, “The GST tax including the 25% cess will definitely curb the growth of the hybrid segment. Many OEMs who have invested or were planning to invest in the hybrid technology will start reevaluating their plans. There will be a negative impact on sales as well.”
In the last few years, India has emerged as one of the fastest growing markets for automotive with global auto majors investing in the country to increase their market share. Barring hybrid, all other types of vehicles are now being taxed at the same rate as they were before GST. So what will be the net effect of GST on auto industry?
Growth prospects intact, but uncertainty in short term
Dr Aulbur answers, “Barring the hybrid segment, I do not foresee any effect on sales. However, the constant change in policies and tax structure will create insecurity amongst the OEMs and their future plans of expansion and investment in the country. Such changes negatively impact the long term planning, especially for foreign OEMs. The tax structures and policies need to be stable and implemented consistently for the industry to grow.”
While the overall business prospect of the auto industry remains intact in the long run, the sentiment, at the moment, has been shaken. The government will have to clear the clouds of uncertainty in taxes and policy so that the auto industry can again drive fast on the growth highway.
“Barring the hybrid segment, I do not foresee any effect on sales. However, the constant change in policies and tax structure will create insecurity among the OEMs and their future plans of expansion and investment in the country.”
- Dr Wilfried Aulbur,
Managing Partner, Roland Berger Strategy Consultants India
“As a leading luxury car maker, this will also affect our future plans of expansion under 'Make in India' initiative, which aims at making and selling world-class products in India.”
- Roland Folger,
MD & CEO, Mercedes-Benz India