GST implementation in July may slow down automobile sales next month

Key highlights:

• GST implementation to moderate sales momentum across segments
• Will result in lower dispatches from OEMs
• June seasonally weak month for auto companies

The automobile sector saw mixed sales in the month of May. While passenger vehicle sales saw a strong growth in May and two-wheelers saw a recovery in sales, commercial vehicle (CV) sales remain week.

However, the next month is expected to see weak sales due to the implementation of the Goods and Service Tax (GST) from July 1, 2017.

The reason is that the GST implementation from July 1 will result in lower dispatches from original equipment manufacturers (OEMs) to retailers or dealerships in the coming months, according to a Nirmal Bang research report.

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“Going forward, we expect the sales momentum to moderate across segments on implementation of GST with companies refraining from making higher wholesale dispatches to dealers,” said automobile analysts Gaurant Dadwal and Vivek Sarin in the report.

The reason automobile manufacturers will refrain for making higher sales to dealerships is that they will wait for the new taxation scheme to kick in and get the benefits of it. The GST tax rate announced by the government for the automobile is on the same rate as the current taxation policy and in some segments, such as luxury cars, even lower.

The GST rate announced for the automobile industry is 28%. However, small petrol cars will attract an additional cess of 1% and 3% cess on small diesel cars. Luxury cars will get an additional cess of 15% and bikes with engine capacity of over 350cc will also get an additional cess of 3%.

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Auto manufacturers will start pushing vehicles after July as GST will also make things simple for them in terms of uniformity.

Besides this, the report expects the sales momentum to moderate as they enter a seasonally weak month for automobile sales. This will add to the lower sales growth in the month of June.

Any further delay in the GST rollout could also see a slowdown in sales in the automobile industry.

We can however expect higher sales in the months following July in the months running up to the festive period.

“Factors like a favourable monsoon, focused investment in rural areas and implementation of Goods and Services Tax are expected to spur demand,” said the report.