While the automakers are bullish about a 10% rate cut, a GST relief could cause a revenue loss of about Rs 55,000-60,000 crore on an annual basis
The Goods & Services Tax Council will meet on September 20 in Goa to decide on a rate cut for automobiles, taxed currently at 28%.
While the automakers are bullish about a 10% rate cut, a GST relief could cause a revenue loss of about Rs 55,000-60,000 crore on an annual basis.
Finance minister Nirmala Sitharaman had indicated on Tuesday that more measures were in the pipeline for the auto sector.
The minister, however, remained noncommittal on the rate cut saying it was for the GST Council to decide.
Some states, including Kerala, West Bengal, Bihar and Punjab, are opposed to the cut. All states and union territories are members of the GST Council which unanimously decides on the proposals before it.
"It will be difficult for the states to forego their share of revenue on account of reduced collections due to a rate cut. The GST Council will be apprised of a cut's revenue implications. It is up to to them to decide whether to go for it after considering revenue loss," said an official on the condition of anonymity.
The government will lose about one-third of the revenue it gets from taxes and cess on automobiles if the Council favours a 10% rate cut.
Monthly tax collections from automobile are around Rs 15,000 crore, which has fallen to Rs 11,000 crore due to slowdown.
Another way being explored is an increase in cess on luxury and sin goods category, which includes cars, tobacco and soft drinks.
If the states don't agree with it, the Centre will have to compensate the states for any revenue shortfall on account of lower tax collections.
The Centre has made a commitment to the states to compensate for five years, if their annual GST revenue growth was less than 14%.
However, the central government finds it very difficult to compensate the states and expects them to take a hit. The central government's GST collections have remained below the expected Rs 1 lakh crore mark during this fiscal. Further lowering of the GST mop-up may strain the government's finances and make it difficult to meet the fiscal target.
GST fitment committee as well as states are not in favour of a rate cut. "If there is a rate cut, it may happen for a particular category of automobiles such as hybrid vehicles. But it is unlikely to be major. Anyway, a rate cut alone or a slight rate cut may not help the automobile sector much," said Pratik Jain, partner and indirect tax expert at PwC India.
"GST is not the only tool. The government also has other measures to incentivise the sector. Among other things, it can give more export incentives than the sector gets at present. Currently, tax rates are not higher than they were pre-GST," he said, adding it is debatable that GST is the reason for the slowdown in the sector as there could be several other factors.
Domestic passenger sales fell over 31% in August as compared to the year-ago period. Automakers have been forced to temporarily shutter plants as consumer demand continues to be weak for last several months.
With consumers postponing their purchases and companies unsure of consumer sentiment during this festive season, the auto industry is pinning its hopes on the rate cut for a sales revival.
"It is difficult to forecast how the festive season will be this year. We have stopped forecasting anything beyond four hours," Mahindra & Mahindra managing director Pawan Goenka had recently said in an interview.
Prashanth Agarwal, a partner at PwC India, said: "Industry believes that a GST rate cut could go a long way in boosting diminishing demand in the badly hit auto sector. It's a sensitive situation for the government as on the one hand it is trying every possible measure to support the economy but on the other, a cut could significantly dent the already falling GST revenues (which dipped below Rs 1 lakh crore last month). The government could look at a partial GST relief for auto in teh form of a reduction in rate for two-wheelers, hybrid cars and small cars. It would need to be seen how much positive impact such a cut could have considering the upcoming festive season."
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