The new GST slabs are significantly changing the Indian car market, as most vehicles have become more affordable, and the tax structure has been simplified. The old system with the wavy GST and cess rates has been replaced by a far simpler two-slab system with a special rate on luxury and large vehicles. This will initiate demand, especially in the mass-market segment.
The New GST Structure for Cars
The new GST policy, commonly known as GST 2.0, has rationalised the taxation on automobiles, abandoning a multi-tiered system with a compensation cess for a simplified one.
- Small Cars (18% GST): These are characterized as passenger cars with a length of less than 4 meters with petrol engines of not more than 1200cc or diesel engines of not more than 1500cc. The cars used before were liable to 28% GST and 1-3 cess and totaled to 29-31. With the new regime, the tax has been decoded into a flat 18% GST, and no cess has been imposed, and the price has gone down significantly by approximately 12-12.5. This renders the trending models such as the Maruti Suzuki Swift, Hyundai Grand i10, and Tata Tiago much cheaper.
- Mid-size (40% GST): This group comprises cars that have an engine capacity of over 1200cc (petrol) or 1500cc (diesel) or a length of more than 4 meters. Earlier, these cars were charged both 28% GST and a cess of 15-22, making the overall taxation charges 50% on the SUV. The new policy gives a flat 40% GST on such vehicles, and the cess has been eliminated. Even though this headline GST rate appears to be high, the abolishment of the cess will result in a net decrease in the total tax. It implies that the price of the large SUVs such as the Mahindra Thar, Hyundai Creta, and Toyota Innova Crysta will decrease as well.
- Electric Vehicles (EVs) (5% GST): EVs will continue to be charged a low GST rate of 5%, which will help solidify the intention of the government to encourage green mobility.
Impact on the Indian Car Market
It is believed that the new GST slabs will have a wide-ranging effect on the whole automotive ecosystem.
For Consumers
- Higher Affordability: The short-term and most notable effect is lower car prices throughout the board. Small cars will be the greatest beneficiary of the tax cut because first-time and middle-class consumers are the biggest consumer group in India. This will turn around the recent drop in sales of compact cars and hatchbacks.
- Boosts Consumer Confidence: The simplified tax structure gives certainty and transparency, which will most likely enhance confidence among buyers, particularly during the festive season.
- Lower Road Tax: Road tax depends on the ex-showroom price, and with the reduced prices that come with the tax cuts, there will be further savings on the on-road price to the consumers.
For the Auto Industry
- Demand Revitalization: The lowering of prices, particularly the entry-level segment, is a significant shot-in-the-arm to the industry, which has been struggling with decreasing sales in the entry-level segment. Their robust small car portfolio companies such as Maruti, Tata, and Hyundai, are likely to be the largest beneficiaries.
- Streamlined Operations: The removal of the complex cess design makes the compliance process simpler to manufacturers and dealers, making their compliance task easier and eliminating long-standing classification conflicts.
- Increased Ancillary Industry: The more cars are sold, the more auto parts and auto components will be demanded. It has also rationalized the GST rates on auto parts to a standard 18%, which will simplify the supply chain and help thousands of MSMEs who constitute an important segment of this ecosystem.
- Certainty of the policy: The transparent and justified tax policy attracts new investment in the industry and resonates with the Make in India project.