The government's assurance to the auto industry on the reduction in goods and services tax (GST) on two-wheelers brought some cheers to two-wheeler makers and investors. Companies are optimistic that if the proposal does get accepted by the GST Council, it will certainly push demand ahead of the festive season and add heft to the recovery underway. Two-wheeler sales at most firms have been rising month-on-month since June.

On Wednesday Finance Minister Nirmala Sitharaman said the GST Council would look into the auto industry’s demand for lowering the tax rate on two-wheelers, which are now taxed at the highest slab rate of 28 per cent. Since two-wheelers are neither a luxury nor a sin product, they merit a rate revision. Consequently, this will be taken up with the GST Council,” Sitharaman said.

Officials at two wheeler manufacturers including Hero MotoCorp, TVS Motor Co, Bajaj Auto and Royal Enfield welcomed the move adding that if the rates are reduced to 18 per cent it will boost sales in a big way and bode well not only for the two wheeler sales but also the economy and help in job creation. The manufacturers will be passing on the benefits to the buyers in its entirety, they said. A 10 percent reduction will translate into a price reduction of Rs8000 to 10,000.

But they also added that it will help if the rate cut takes effect sooner than later as any delay will cause lot of uncertainty among buyers, dealers and manufacturers as buyers tend to postpone purchase.

“We are just recovering from the Covid-19 impact and on the threshold of recovery. The sales are being driven by the pent up demand and the need for personal transportation. If there is any shadow of doubt over the GST cut the whole momentum may get lost,” said Rakesh Sharma. More than anything else the industry needs certainty, he added.

Sudarshan Venu, joint managing director of TVS Motor echoed Bajaj’s Sharma. "We look forward to it soon so that the certainty and clarity is there for customers and for the entire supply chain.

Vinod K Dasari, CEO, Royal Enfield also said “The government should announce it at the earliest” and the cut should take effect across the entire range of made in India motorcycles.

Two-wheeler sales (wholesales) fell 15 per cent year-on-year in July 2020. In contrast, the decline in retail sales was much sharper at 37 per cent.

An ICICI Direct analyst said that lowering of tax on final product without a corresponding reduction in components used to manufacture it (i.e. inverted duty structure) would not really benefit end consumers. If the change is made applicable for the entire two-wheeler value chain, however, there would be a reduction in final prices by about 8 per cent. However, there is a case wherein the benefit may not be extended to premium motorcycles (such as 150 cc) and prices for those products would remain unchanged.