Auto stocks, GST rate cut: HSBC shares 3 scenarios

HSBC on Monday said the government is looking to simplify the GST slabs, potentially altering the landscape for the country's automotive sector. The current GST slab of 28% may be reduced to 18%, with the possibility of discontinuing the additional cess imposed on top of GST rates for automobiles. Such a change could significantly affect both government revenue and auto demand, the foreign brokerage said.

The reduction of GST would likely lead to a decrease in government revenue in the short term; however, it is expected to stimulate demand in the automotive sector, potentially leading to increased job creation, HSBC said.

 "GST reduction would negatively impact government revenues in the near term but drive up Auto demand and hence job creation in India," HSBC noted. Presently, passenger vehicles (PVs) contribute between USD 14-15 billion in GST collections, while two-wheelers (2Ws) generate $5 billion.

HSBC has suggested three scenarios regarding the proposed GST cut. The first scenario involves reducing GST to 18% for smaller cars while simplifying the tax structure for larger cars. This would mean a price drop of about 8% for smaller cars and 3-5% for larger ones. Companies like Maruti Suzuki India Limited (MSIL), heavily invested in small cars, would benefit significantly.

In the second scenario, a flat reduction from 28% to 18% across all vehicle sizes is considered. Although this approach simplifies the regime, it is deemed less likely. This scenario would result in a 6-8% price reduction across vehicle categories but would mean the government would absorb a $5-6 billion revenue hit. Such a significant cut could also slow down the already sluggish growth of Electric Vehicles (EVs) in India.

Scenario three envisages a flat reduction to 18% along with the cessation of all additional cesses. This scenario could simplify the tax structure greatly, but it is seen as an unlikely option due to the substantial impact on government revenues, which could halve current GST income.

HSBC highlighted that "while 2Ws and small cars look certain to be beneficiaries," the influence on EV companies is adverse, with uncertainty surrounding large vehicles. The bank also cautioned that "other implications to keep in mind are: (1) EV players will face a disadvantage if taxes are reduced on ICE vehicles; (2) some states may look to increase the road tax if GST is reduced; and (3) this news may materially impact near-term demand."

The potential changes have initiated discussions among Original Equipment Manufacturers (OEMs) and investors, who are now evaluating exposure to various GST rates. "The specifics are unknown so far, hence we look at various scenarios and highlight company-level exposure to various GST rates and a framework for investors to evaluate the relative benefit across OEMs," HSBC added.

As these scenarios unfold, stakeholders within the auto industry will be closely monitoring the government's decisions, which will ultimately shape the future trajectory of the sector. Companies are particularly interested in understanding how these adjustments might influence their competitive positioning in the market.

The conversation around GST reduction is expected to continue as the government weighs the benefits of increased auto sector activity against the drawbacks of reduced tax revenue. The impact on consumer prices, particularly in the small car segment, will be a critical factor in these discussions.