GST Relief for Auto Sector: Will the Government Also Address Cess Concerns?

The Government of India has finally rolled out long-awaited GST reforms, aiming to boost consumer spending and stimulate demand across industries. The automobile sector has welcomed the move, calling it a timely step that could drive sales, especially during the upcoming festive season.

Major Relief for Small Cars and EVs

• Electric Vehicles (EVs): GST remains at 5%, keeping EVs affordable.

• Small Cars (up to 4 meters, 1200cc engine): GST reduced to 18% from the earlier 28%.

  • This 10% cut is expected to significantly benefit small car buyers and improve sales for automakers.

Big Cars, SUVs, and Luxury Vehicles Also Benefit

The reforms go beyond small cars. Tax on premium SUVs, luxury cars, and high-end EVs has been brought down to 40%, with the cess now abolished. This change could make aspirational, high-value cars more accessible to buyers.

Compensation Cess Abolished

One of the biggest takeaways from the GST Council’s decision is the abolition of compensation cess. While the move is being seen as pragmatic, industry stakeholders have flagged the need for clarity on how dealers’ existing cess balances will be adjusted.

• Dealers will now get input tax credit on old stock, allowing them to build inventory ahead of Navratri and Diwali sales.

• However, FADA President C.S. Vineshwar has urged the government to clarify the mechanism for settling pending cess balances.

Festive Season Boost Expected

The new rates come into effect from September 22, just ahead of Navratri. With consumer sentiment typically high between Navratri, Dussehra, and Diwali, automakers are optimistic that the GST relief will translate into strong sales momentum.

Impact on Two-Wheelers

The new rules also revise taxes for motorcycles:

• Above 350cc bikes: GST has been increased by 9%, affecting brands like Bajaj, Triumph, and Hero-Harley, which compete with Royal Enfield.

• These companies may need to recalibrate their pricing and product positioning strategies.

Concerns from States

While the central government’s move is being hailed, several states have raised concerns about revenue loss. To offset this, some states may consider hiking vehicle registration charges, which could partially dilute the benefits for buyers.

According to Saurabh Agarwal, Automotive Tax Leader, EY India, automakers will need to renegotiate with states since many state-level incentives are tied to GST rates. This could create complexities around overall cost structures and subsidy clawback periods.