Frequent changes to GST rates disrupt industry and hamper a smooth transition
Unlike most other industries, automakers were an ecstatic lot last month when the GST was rolled out. Strangely enough, the new tariff structures put in place by the GST Council ended up lowering the effective tax rates on large cars and SUVs, from 50-55 per cent to 43 per cent. This was on account of the Council fixing the cess component on these vehicles at 15 per cent, on a 28-per cent basic GST. This ran counter to the popular view, reiterated by the Courts, that car buyers must be actively dis-incentivised from acquiring large diesel-guzzling vehicles. But it turns out that this celebration was premature. Tweaking the cess component again last week, the GST Council has pegged the cess for large cars and SUVs at 25 per cent, taking their effective GST rate to 53 per cent.
If automakers are upset, they have every reason to be considering that it is not even six weeks since GST came into being. The transition to GST has already been difficult for most manufacturing industries, with the mammoth task of recalibrating their supply chain, repricing of the carried forward inventory, not to talk of transitioning dealers and vendors to the new online tax filing system. Large automakers, having prepared in advance for the regime, had also lowered their selling prices post-GST citing the lower effective tax rates. But the unexpected hike in cess will now require them to go through this process of re-adjustment all over again. The automotive industry has already been going through its share of speedbumps with the ban on diesel vehicles in Delhi, demonetisation and its aftermath and the Supreme Court verdict on clearing up Bharat Stage III stocks by end-March which caught the industry unprepared. They also received a nasty jolt when Maharashtra imposed a 2 per cent road tax in a backdoor move to protect revenues, soon after the GST rollout. Therefore, while there may be an element of exaggeration to the claims that the new tax rates will derail the sector and prompt multinational automakers to pull back on their India plans, the industry’s angst is not without basis.
Product development is critical for automakers. However, frequent policy changes disrupt both new product development and capacity building. A country that has aspirations of becoming the third largest automobile producer in the world by 2020, and pinning its hopes on ‘Make in India’, cannot afford such policy flip-flops. Nor can the GST Council completely lose sight of consumer interests in its enthusiasm to maximise revenues from ‘demerit goods’. Frequent tinkering with GST tariffs and rules is avoidable, as it can prolong the disruption and teething troubles brought on by this already challenging transition.