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GST: Car firms brace for short-term losses

 

Mumbai: Passenger vehicle makers are adopting diverse distribution and sales strategies ahead of the 1 July roll-out of goods and services tax (GST).

Some, such as Hyundai Motor India Ltd and Mahindra and Mahindra Ltd, have chosen to only marginally curtail dispatches to dealers and offer steep discounts to ensure buyers do not postpone purchases until GST is implemented. Others, such as market leader Maruti Suzuki India Ltd and Toyota Kirloskar Motor Ltd, have cut shipments to ensure dealerships are able to liquidate stock. These firms are offering discounts only on a few models.

Pawan Goenka, managing director at Mahindra and Mahindra, said volumes dispatched to dealerships and discounts are a function of the extent of loss being incurred on a model due to the transition to GST. While for automobiles the loss on account of transition varies from 0.2% to 6%, for tractors, it is as high as 7% across the model range, he said.

“We are trying to curtail dispatches, but we cannot do much. It’s about creating that fine balance,” said Goenka, citing the case of the hybrid Scorpio, prices of which are expected to rise by as much as Rs1 lakh owing to the peak GST rate of 43%. “We may not pass it on fully, but we’ll have to pass it on to a great extent,” Goenka said.

Under GST, most vehicles will fall in the highest tax bracket of 28%, with an additional cess ranging from 1-15% based on the segment the vehicle falls under, its engine size and type (petrol or diesel) and the size of the vehicle.GST rate on cars has been set at 28% with an additional cess ranging from 1-15%. Photo: Bloomberg

Broadly, effective GST rates indicate the highest tax savings for sport utility vehicles (SUVs) for which the rate is down to 43% from the present 55.3%. Depending on state-level taxes, prices of SUVs are expected to fall by 3-4%, Goenka said.

The GST rate will also be lower for mid-sized cars or sedans and large cars. There will be marginal tax savings on small cars (except diesel).

The local arm of Korean car maker Hyundai is pulling out all stops to woo buyers. “We have taken a very strong sales promotion which is equivalent to the year-end promotion, while also giving a price protection to the customer for post GST prices,” said Rakesh Srivastava, director, sales and marketing, at Hyundai Motor India.

With the price protection, the buyer is eligible to get a refund should the prices go down from 1 July.

The move, aimed at helping reduce unsold stock at dealerships, has led to a rise in the number of enquiries and bookings, making June a month of high retail sales, Srivastava pointed out. He declined to comment on the extent of discounts as they vary from state to state and according to the model opted for.

“I’m not making any money in this transition; on contrary, I’m making a loss as I have to cover my channel partners for the variation in prices,” he said.

A Hyundai dealer who declined to be identified said, “This is merely sales tactic as most of (the) manufacturers are already aware of the GST rates and its impact on prices.”

R.S. Kalsi, executive director sales and marketing at Maruti Suzuki, did not respond to calls and text messages. A spokesperson for Maruti declined to comment.

A Maruti dealer who spoke on condition of anonymity said the firm cut deliveries in June to liquidate stock. Also, the discounts being offered are only on select models such as Wagon R and Alto.

N. Raja, director and senior vice-president of sales and marketing at Toyota Kirloskar Motor Ltd, said unlike other manufacturers, Toyota is not offering any schemes. “My dealer billing this month will be 50% less than what we normally do,” said Raja, adding June sales will be weak on account of fewer dispatches. Auto makers report dispatches to dealers and not end buyers.

Subrata Ray, an analyst at ICRA Ltd said he expected most manufacturers to post a decline in volumes this month and sales to be under pressure in the first half of the next month.

 

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