GST Effect on New Cars

GST Effect on New Cars

The Goods and Services Tax (GST) moved a step further to becoming a reality with the Lok Sabha unanimously passing the amendment that enables the highly anticipated and much needed reform.  The current situation in the country with the various direct and indirect taxes has not been very efficient for the consumer and well as the businessman. There are as many as 17 different central and state taxes, which has resulted in major economic chaos and has not been encouraging for people doing business. 

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The GST is expected to change all of this. The consumer demand is said to increase, as the benefit of the reduced tax and thus reduced cost would be passed onto them. Also, it will ease the burden of doing business.

Change in Prices

For 4 wheelers - As the GST aims to reduce the multiplier effect of taxes on goods and services, it will substitute the VAT, CST (Central Sales Tax) and other entry taxes. The effective tax in a normal scenario works out to be in the range of 26% - 30%. Under the GST, it is expected to drop to 15% - 17%!
The main beneficiary of this system in the vehicle market would be the mid-size segment (1100 - 1500 cc). The estimated tax decline for this bracket could be well around the 20% mark. This would in turn boost demand in the price-sensitive segment. Smaller cars could see a decline of about 10% and prices of luxury cars may be revised by 5%. All in all, get ready for more traffic on the road!

However, with regard to vehicles in the luxury segment, there is unlikely to be a significant impact on demand given the small amount of the benefit. Moreover, the customs duty is among the taxes, which will be left out of the GST and therefore prices of vehicles brought in as imports or Completely Built-Up (CBU) units is unlikely to change.
Change in price structures

The implementation of GST is likely to result in a shift in price structures across the board. With a standard tax rate for both the compact sedan/hatchbacks and mid-size/full-size sedans, the price gap between them will definitely shrink. A higher number of buyers may thus naturally choose to go for vehicles belonging to the latter segment. This would be interesting to see as it will be a complete change in consumer behavior from what it is now. (Source: AC Nielsen)

Moreover, apart from the change in buying preference due to the shrinking gap between small cars and mid-size segment, the implementation of the GST could force some manufacturers to re-assess their strategies especially in the sub-four-metre segment, which was born out of the excise duty benefits. You could very well see this segment drop low on the sales charts, before eventually disappearing. Sorry to say, but I am really looking forward to this; all of them are a bunch of ugly looking vehicles.

One Country, OnePrice

Besides the benefits that have been talked about above, GST will finally help OEMs to have a uniform ex-showroom price of their vehicles across the country. As you know, currently the prices of the same car varies from state to state, due to the different excise structures that each state follows. This uniformity in prices would ease concerns among car buyers over deciding on a place to buy their cars from and help curb the practice of registering them in different locations. 

All in all, it looks positive so far and yes, this is all based an assumption that the incidence of the relief will be passed on to the consumer. Fingers crossed.