Boom on the Horizon: GST Cut to Fuel India's Auto Sector Surge

The Indian automobile sector is on the brink of significant growth, as optimism mounts regarding a potential Goods and Services Tax (GST) rate reduction. A recent report by Jefferies suggests that an announcement could be made as early as next month, promising substantial benefits for two-wheelers and small passenger vehicles.

The GST rate cut aims to reduce tax slabs from 28% to 18% for most vehicles and from 12% to 5% for tractors. This could translate into a 6-8% reduction in on-road prices, greatly enhancing affordability and supporting a recovery in demand. To fund this cut, the GST Cess on items like tobacco, coal, SUVs, and aerated beverages may be incorporated into GST, expanding the tax base.

Currently taxed at 28-31%, two-wheelers and sub-4 meter cars with a tax of approximately 29-31% are expected to benefit significantly. Large SUVs, which currently bear a tax of 45-50%, may see a reduction to around 40%. A proposal to lower GST on tractors from 12% to 5% could create an inverted duty structure due to higher input costs, according to the report.

Jefferies noted that a GST reduction of 7-10% could boost consumer sentiment considerably. It also highlighted the potential increase in demand for hybrid vehicles, which are presently taxed like internal combustion engine vehicles, if their rates align more closely with battery electric vehicles at 5% GST.

The report prompted Jefferies to upgrade its industry volume projections for FY26-28, raising estimates for two-wheelers and passenger vehicles by 2-6%. A compound annual growth rate (CAGR) of 10% is expected for two-wheelers, 8% for passenger vehicles, 9% for tractor sales, and a slower 3% growth rate for trucks over FY25-28.

Despite sluggish demand in recent months—with April-July registrations showing only 2-3% year-on-year growth—the report anticipates a surge during the festival season. Income tax reductions, liquidity improvements, and expected GST cuts are seen as positive drivers for the sector. (ANI)

(With inputs from agencies.)