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Last Updated : Aug 09, 2016 08:11 AM IST | Source:

GST to simplify taxes for auto cos, may boost stock prices

The rollout of the Goods and Services Tax (GST) is expected to bring in good times for the automotive industry, which has lately struggled from tough demand conditions and faced judicial and regulatory heat on environmental issues.

Shweta Mungre

The rollout of the Goods and Services Tax (GST) is expected to bring in good times for the automotive industry, which has lately struggled from tough demand conditions and faced judicial and regulatory heat on environmental issues.

Analysts expect the GST, which will do away with a wide swathe of existing taxes, to not just result in reduced effective tax rate on automobiles but also do away with the differential taxation structure, which forces companies to base their business plans around it.

Currently, taxes and duties on passenger vehicles are based on engine capacity and vehicle size. Accordingly, small cars (with petrol engine capacity below 1,200cc and less than four metres in length) attract the lowest effective tax rate of roughly 27-28 percent including value-added tax and excise duty.

Further, such a move is also expected to do away with innovations such as the sub-4 metre compact cars, which are made and sold only in India, chiefly because they enjoy the advantage of a lower interest rates.

The sub-4 metre rule has spawned a variety of models such as most hatchbacks, sedans such as the Swift Dzire and Amaze and even compact SUVs like the Brezza and Nuvosport.

A widely-anticipated 18 percent GST rate would mean significant savings for auto companies, at least some part of which they will pass on to consumers.

On average, the weighted average price benefit of GST implementation is likely to translate into around 5-7 percent price decline in small car segment, according to a Reliance Securities report.

Assuming an 18 percent GST rate, Nomura expects around 10-17 percent fall in overall passenger vehicle prices.

The dismantling of the existing structure would also lead to fewer complications when it comes to paying tax. Companies currently shell out 2 percent central sales tax (CST) for manufacturing in one state and selling in another. This is built into the product cost. The CST will likely make way for the integrated GST (IGST), which will be fully creditable by the dealer when he sells the car in another state.

Not surprisingly, many analysts say the benefits of a simpler and lower-rate tax structure is likely to flow into stock prices of auto companies. The BSE Auto index is up 30 percent over the past six months to reflect to some of this optimism.

"Many stocks in auto space are big beneficiaries [of the GST rollout]," Rajat Rajgarhia, MD - Institutional Equities, Motilal Oswal told CNBC-TV18 in a recent interview. "Companies such as M&M can see a significant reduction in specific categories, which can boost their margins over the periods to come."

He, however, added that a proposal to levy a 40 percent 'sin tax' on luxury products could be a dampener should some cars fall under this bracket. "So, we will have to wait and watch out for that."

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First Published on Aug 8, 2016 05:39 pm
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