Indian automobile industry is among the largest drivers of manufacturing GDP, employment, and tax revenues. The sector has witnessed periodic dips in recent times with changes in demand, increasing input costs, and policy changes.
Of policy support releases at the top are the Goods and Services Tax (GST). GST simplification can be a much-needed spur to growth, according to industry players. The case now is whether GST reforms can recharge India's auto space, bring down prices, and release demand.
GST's implementation in 2017 replaced a expensive web of central and state duties with one. In the auto space, GST brought in transparency and ease, eliminating cascading taxes as well as simplifying logistics. But the industry still has to contend with higher tax rates than a majority of other industries. Since cars are deemed to be luxuries from the point of view of a taxman, they are taxed at some of the highest rates of GST. Such a classification is still in doubt, especially considering that the industry provides employment and manufacturing industry.
At present, cars and utility vehicles fall in the 28 percent GST slab along with extra 1 to 22 percent cess depending on engine size and type. Two-wheelers also benefit from high tax incidence, discouraging demand in value-sensitive segments. Electric vehicles fall under comparatively lower 5 percent GST slab, which is a step of government encouragement towards clean transportation. Such uneven taxation has triggered debate regarding whether automobiles can be thought of as essential economic enablers or comfort-oriented luxuries.
Representatives and associations of the industry have been requesting GST rationalization in the past. These include lowering the GST for two-wheelers to 18 percent from 28 percent currently, taking into account their nature as a mobility need of the common man. Passenger car manufacturers would like a simultaneous move to place automobiles under the 18 percent slab with lesser rates of cess. These changes would reduce the cost of car purchasing, boost sales, and boost customer base. Simultaneously, higher levels of sales volumes can offset any loss to the government in terms of lower overall tax collection.
New GST rates can encourage many good things to happen. Car manufacturers would experience higher levels of production, enabling proper utilization of factory capacities. With enhanced on-demand visibility, enterprises would be able to invest more in research, technology, and infrastructure. Consumers would get lower fares, thus encouraging personal mobility at lower costs. This affordability and demand cycle would provide a boost to an industry that generates directly and indirectly employment for millions of individuals in the nation.
The government's vision of electrifying mobility is best supported by encouraging GST treatment of EVs. At 5 percent GST, EVs are already the more favored choice compared to internal combustion engine vehicles. Rationalizing GST on traditional vehicles, however, can support a more balanced shift. Gradual slowing of rates would dissuade consumers from delaying purchases because of overcharging and thereby ensure robust demand even while the takeoff of EVs accelerates. Further, fair tax practices across car models would enhance investor confidence in India's long-term auto policy regime.
The multiplier effect of the auto industry on the economy can't be overestimated. It supports support industries such as steel, rubber, plastics, and electronics. Rationalized GST rates would stimulate demand along these supply chains, creating wider employment opportunities. A successful automotive segment would also yield improved excise and road tax collections for state governments. Further, greater mobility in rural and semi-urban India could result in increased productivity, contributing to India's overall economic growth.
Organizations like Society of Indian Automobile Manufacturers (SIAM) and Federation of Automobile Dealers Associations (FADA) continue to worry about the need for GST reforms. Lowering the tax on two-wheelers would not only drive sales but also enhance the government's rural development and financial inclusion agenda, according to analysts. Experts add that although EV incentives are important, the bedrock of automobile demand in India is mass-market cars for which the rationalization of taxes is essential for facilitating sustainable growth. Policymakers must walk the tightrope between the revenue aspect and the ultimate benefit of the industry.
Whether GST reforms have the potential to turbocharge India's automobile industry places attention on the delicate balance between industry growth and fiscal policy. Tax rationalisation can increase demand, enhance supply chains, and generate employment. Meanwhile, linking policy to affordability will drive India's mobility revolution faster. With GST reforms debates gaining momentum, the decisions taken will set the direction for the industry over the next few years ahead.