New Delhi: The Union government has finally decided to bite the bullet on a tax cut for the automobile sector, on a day the industry reported the worst August for passenger vehicles in 18 years. Dispatches to dealerships during the month plunged 34% from a year ago, sales data showed, in the sharpest decline since September 2001.
The government will take a proposal to reduce the goods and services tax (GST) rate on automobiles to the GST Council, finance minister Nirmala Sitharaman told reporters in Chennai, while briefing them on efforts to arrest the economic downturn. Automobiles currently attract the highest tax rate of 28%, apart from a cess.
Six top automakers together dispatched 171,193 vehicles to dealerships in August, 34% below 259,925 vehicles recorded in August 2018. Indian manufacturers count factory dispatches to dealerships as sales. These numbers follow a 31% sales drop in July.
Maruti Suzuki India Ltd, which makes one in every two cars sold in the country, posted domestic sales of 93,173 units, down 36% year-on-year (y-o-y) as demand for its small cars cooled.
Sales of Maruti’s small cars fell 40% y-o-y to 64,397 units in August. Analysts have pinned hopes on Maruti’s Bharat Stage VI compliant S-Presso hatchback to be launched this month to revive sales in the festive season. Sales of midsize sedan Ciaz fell 77% to 1,596 units. Although at 8,658 units, van sales fell 37%, utility vehicle sales rose 3%.
“It (the tax cut proposal) has got to go to the GST Council, where all state finance ministers assemble,” Sitharaman said. “It is for them to take a call. I have suggested to them (automobile makers) that I will take it to the Council but the final decision will be theirs… I will wait for the GST Council to take a call.” The federal indirect tax body meets next on 20 September.
Mahindra and Mahindra (M&M) reported total passenger vehicle sales of 13,507 units, down 32% y-o-y, and a 28% y-o-y drop in commercial vehicle (CV) sales to 14,684 units. Among CVs, medium and heavy commercial vehicles were hit the most, falling 69% to 354 units.
Tata Motors Ltd posted domestic passenger vehicle sales of 7,316 units, a 58% decline y-o-y. “Our retail sales were 42% more than offtake and as a result, the network stock came down by over 3,000 vehicles. This prepares dealers well for the festival season,” said Mayank Pareek, president (passenger vehicles business unit) at Tata Motors. Sales of CVs fell 45% y-o-y to 21,824 units on poor freight availability and lower truck rentals. Girish Wagh, president of the CV unit, however, said retail sales could have exceeded wholesales by over 25% in August.
Mint reported on 11 August that the GST Council is preparing for a meeting to be convened after the finance ministry decides on the extent of benefits to be given to the auto industry.
A reduction in GST, or cess, or both, could give some relief for the automobile sector facing a crippling demand slowdown, while taking a toll on flagging tax revenues. Central and state governments may have different views on this, and reversing a rate reduction later may be more politically difficult in the case of GST than in the case of cess.
A decision on the rate cut will be taken by the council in light of the tax revenue collection trends.
The finance ministry said on Sunday that central and state governments collected ₹98,202 crore in August for transactions in the previous month, a 4.5% increase from a year ago, but below the ₹1.02 trillion collected in July 2019. Although subdued revenue collections reduce the fiscal space for tax cuts, the government at times takes the view that a revival in industrial growth could help make good any revenue loss from a tax cut.
“While the GST rate is one of the key factors impacting automobile prices and thereby demand, any reduction in rates would need to consider the revenue impact in the context of the current year collections being lower than that budgeted,” said M.S. Mani, partner at Deloitte India.
ICICI Securities said in a recent report that prospective buyers are deferring purchases as automobiles are not currently a consumer priority.
“The auto industry continues to be subdued in the month of August due to several external factors. We are optimistic and hopeful of a good festive season going ahead,” said Veejay Ram Nakra, chief of sales and marketing (automotive division) at M&M.
Meanwhile, Sitharaman also said the government’s efforts to promote electric mobility should not be misconstrued as promoting electric vehicles at the expense of internal combustion engine vehicles.
“All vehicles will have their due market share. It is not that we are promoting one segment of the industry at the expense of another,” said the minister.
She also said the feedback received from the industry about the measures announced so far to support growth was positive.
A report by credit rating agency Icra Ltd, which estimates a 4-7% decline for the overall passenger vehicle segment in FY20, pointed out that entry-level and midsize hatchbacks have witnessed a price increase of over 10% and 6-8%, respectively due to new regulations and commodity prices.
Calls for strong measures to support the industry have been growing in recent weeks, as economic indicators give worrying signs of a sharp deceleration in growth.
India’s economy grew 5% in the June quarter, its slowest pace in six years, official data showed last week.
This has also prompted criticism from the opposition Congress party on the government’s stewardship of Asia’s third largest economy, which has already lost the tag of the ‘fastest growing major economies’ in the world to China.
“With GDP at 5% growth for the last quarter, it shows the impact of growth momentum and slowdown in consumer spending. It is a free fall for the auto wholesales in August as well, and this trend is likely to continue till the BS IV inventory is cleared as consumers are waiting for heavier discounts on BS IV compliant vehicles,” said Gaurav Vangaal, country lead, LVP forecasting, IHS Markit.
Automobile companies and lobby groups have been urging a tax reduction for vehicles across the board. As a consequence of the decline in consumption demand, lack of liquidity with banks and NBFCs and regulatory changes, sales of automobiles have been on a downward trend since July 2018.
According to a senior industry executive, some customers have been postponing their purchases expecting better discounts from auto makers, at the fag end of this fiscal year. Now, if there is again another round of speculation on reduction in GST rates levied on automobiles, then demand during festive season will be impacted, he said.