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Good news for carmakers; tax across all categories is still lower than pre-GST levels

Dated NEW DELHI, September 18, 2017

Good news for carmakers; tax across all categories is still lower than pre-GST levels

The Goods and Services Tax (GST) Council, in its meeting held on 9th September, has hiked the cess on mid-sized cars (engine <1500cc) by 2%, larger cars (engine >1500cc) by 5% and that for SUVs by 7%. This takes the total tax incidence on these cars to 45%, 48% and 50%, respectively, and will lead to 1-4% price hike. However, cess on hybrid vehicles (for any category) has not been increased, which is a positive. In our view, the overall tax incidence across all categories (except hybrids) is still lower than pre-GST levels, which is a positive. Moreover, with the hybrid tax remaining unchanged, they would be cheaper by 1-4% compared to normal cars in similar segments and this would incentivise companies to make more hybrids depending on cost benefit.

Illustration- Segment wise price change based on revised taxes and cess rates (₹)

>
Category OEM,s ASP Effective Taxes
(Excise,
VAT, Cesses)
-(A)
Other cost(Transpor-
tation,
Dealer Margin,
Road Taxes,
Insurance-
(E)
On Road
Price
Pre-GST
(B)
GST Rate
(C)
Cess
(D)
Price Post
GST
(E+C+D)
% Price
Change
(on Road
Price
Revised
Cess
New Price
Post Revised
Cess
% Price Change
Small Cars
(<4am length,
engine
<1500cc,
Petrol)
100 32.4 26.6 159.028 1 155.6 -2.2% 1 155.6 0%
Small Cars
(<4am length,
engine
<1500cc,
Diesel)
100 34.2 27.0 161.1 28 3 158.0 -2.0% 3 158.0 0%
Mid size Cars
(>4am length,
engine
<1500cc)
100 49.2 30.0 179.2 28 15 173.0 -3.5% 17 175.0 1%
Mid size Cars
(>4am length,
engine>
1500cc)
100 52.7 30.7 183.4 28 15 173.7 -5.3% 20 178.7 3%
SUVs
(>4am length,
engine>
1500cc)
100 56.1 31.4 187.5 28 15 174.4 -7.0% 22 181.4 4%
Hybrids 100 31.3 26.4 157.7 28 15 169.4 -7.4% 15 169.4 0%

In our coverage universe, the tax difference between small cars and larger cars has inched up further, which should be positive for small car demand. Maruti Suzuki (MSIL IN), with ~92% of portfolio from small car segment, remains our top pick in the sector. Also, slightly lower tax on mild-hybrids will encourage OEMs like MSIL and M&M to continue rolling out more hybrid variants like those for Ciaz, Ertiga and Scorpio. We note the increase in cess is less than initial expectations of up to 10% hike. Prices of mid-sized cars and SUVs are still likely to be lower than pre-GST period by ~2-3% and this should benefit companies like M&M as well.

Source: www.financialexpress.com