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Informist, Monday, Aug. 18, 2025

 

By Anand JC

 

NEW DELHI – Indian automobile companies, particularly those manufacturing passenger vehicles and two-wheelers, are expected to be among the biggest beneficiaries of a potential overhaul in the goods and services tax regime, according to analysts. Automakers had sought a cut in GST rates to boost sales, which have tapered off in recent years after the short-lived post-COVID boom.

 

Prime Minister Narendra Modi's "Diwali gift", promised from the ramparts of Red Fort on Independence Day, has buoyed the market's hopes of a tweak to India's indirect tax regime, potentially a big-ticket reform. The proposed rationalisation in GST rates could revitalise India's lagging domestic consumption, according to multiple media reports.

 

News agency Reuters reported over the weekend that the current GST slab of 28% charged on most automobiles may be reduced to 18%. While most automobiles are charged 28% GST, the exceptions are electric vehicles and hydrogen fuel cell vehicles, which are levied GST of 5% and 12%, respectively. In addition, policymakers are reportedly contemplating a removal of the cess imposed on top of the GST rates on automobiles.

 

"We believe lower prices would stimulate demand recovery (in the automobile segment), and the impact would be more in the mass-market segment," Arun Agarwal, vice president-fundamental research, Kotak Securities, said in a note on Monday. "Auto manufacturers would gain from higher revenue and potentially higher margin, resulting in possible earnings upgrade." 

 

The Indian automotive industry contributes around 15% to the total GST collected within the country, according to the Society of Indian Automobile Manufacturers. 

 

Sport utility vehicles are charged the highest tax rate of 50% in India, including GST and cess. Two-wheelers, which form the bulk of automobile units sold in India, attract a tax of up to 31%. Passenger vehicles generate around $14 billion-$15 billion in GST collection while two-wheelers earn the exchequer $5 billion, HSBC Global Research said in a note.

 

If the government reduces the GST on passenger vehicles to 18% from 28%, it could cause a price reduction of around 8%, HSBC said. The brokerage expects Maruti Suzuki India Ltd., which is by far the biggest manufacturer of small cars in India, to be a key beneficiary of such a development.

 

Media reports also suggest that bigger cars could attract a tax of 40% and nil cess post Diwali. This would reduce their prices by around 3-5%, HSBC added.

 

Research firm Nomura said in a note Monday that tractors could be charged a GST of 5% if the current slab of 12% is done away with. "This should make tractors more affordable and benefit demand. Moreover, the upcoming stricter emission norms should help companies absorb the incremental cost as well," Nomura said.

 

Electric vehicle makers such as Mahindra & Mahindra Ltd. and Tata Motors Ltd. could come under some pressure as a GST rate cut on internal combustion fuel-run vehicles would reduce the price differential.

 

"A common rate of tax for small cars and SUVs (sport utility vehicles) may also hand a significant advantage to SUVs. However, EVs (electric vehicles) may see a meaningful impact on demand as the price gap with ICE (petrol, diesel-run cars) will likely increase sharply," Nomura said. In addition, this could be counterproductive for schemes aimed at increasing the adoption of electric vehicles, such as the production-linked incentive scheme.

 

Among two-wheeler companies, Hero MotoCorp Ltd. could gain the most if the automobile segment is levied an 18% GST instead of the current 28%. Hero MotoCorp is the leader in India's entry-level two-wheeler market with a 79% market share. TVS Motor Co. Ltd., which has a 25% market share in India's scooter market, could see increased demand for scooters, Emkay Global Financial Services said in a note Monday.

 

TEMPER EXPECTATIONS

Expectations of a potential positive impact on automobile companies from the proposed GST reforms led to a near-4% gain in the Nifty Auto Monday. However, analysts have sounded the need to exercise caution as the rejig in rates would require the approval of the GST Council, which is expected to meet within the next two months.

 

"We do note that this is not a done deal: GST Council approval is needed and rates on individual categories could change in the final announcement," Emkay said.

 

While the tax relief could provide some much-needed fillip to domestic consumption, analysts have warned that the Prime Minister's announcement could have some negative near-term impact for automobile companies.

 

"Widespread newsflow of GST cut may further slow down consumption temporarily (before Diwali) in certain big-ticket categories such as automobiles and ACs (air-conditioners)," Nomura said. Dealers carrying inventory may bear a loss in the near-term, which may need to be compensated by automobile companies, it added.

 

The Centre has a 33% vote in the GST Council while the remaining share is equally split between 31 states and Union Territories. Analysts feel convincing state governments to cut GST rates could be a hurdle.

 

"GST also forms a large part of states' revenue...with states' fiscal position in a more precarious state than the Centre's, the hit from GST revenue losses may be higher," Emkay said. Some state governments could look to increase road tax to offset the loss caused by a cut in GST rates, HSBC said.  End

 

US$1 = INR 87.35

 

Edited by Tanima Banerjee

 

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