The Indian government’s proposed reforms of the Goods and Service Tax (GST) resulting in the lowering of tax rates could drive automobile demand up by 5-10 percent, according to a report by investment banker Nomura issued on Friday, August 22.
According to Nomura, an indirect tax rate cut under the GST could trigger a meaningful upside for the sector, with passenger vehicle majors Maruti Suzuki, Mahindra & Mahindra (M&M), Ashok Leyland, and TVS Motor expected to be among the biggest beneficiaries.
Currently, automobiles fall under the highest GST slab, with small cars and two-wheelers taxed at 28 percent, while large cars attract 43–50 percent tax depending on size and features.
Under the proposed rejig, the GST rate on small cars and two-wheelers could fall to 18 percent, while rates on larger cars may drop to around 40 percent.
However, motorcycles above 350cc may face an increase in tax burden, with the GST possibly rising from 31 percent to 40 percent.
Nomura noted that the benefits of a GST cut would be more pronounced for four-wheeler original equipment makers (OEMs) than two-wheeler makers. Two-wheeler OEMs are also dealing with cost headwinds from the upcoming anti-braking systems (ABS) mandate, which could eat away nearly half of the GST benefits.
Across the board, auto manufacturers could see improvements of 100–150 basis points in margins, with OEMs having higher domestic exposure positioned to gain the most. For auto component suppliers such as Uno Minda, Samvardhana Motherson and Sansera Engineering, the demand upswing could translate into higher volumes and stronger pricing power in the aftermarket segment. Domestic suppliers in particular stand to benefit as rising vehicle sales improve order books across the value chain, Nomura said.
