Simplify GST on Auto; peg rate only on 2 factors- sticker price & fuel type

After an earlier contribution to the Business Today, I was widely seen by many in the auto industry to have committed the ultimate sacrilege by questioning, what large sections of the industry perceive as its divine right, to unapologetically indulge in blatant profiteering at the expense of India's hapless consumers. (I was actually told on one TV debate that it was needed to fund research though of course no evidence of such worthy pursuit was provided!!) I believe therefore that I must return to the subject - as part of the debate on what ails the industry, and more particularly in the context of the suggestions on GST restructuring sought by the FM.

Beyond the macroeconomic and structural issues, I continue to believe that perhaps a large part of the industry's woes can be traced back to its unbridled avarice. For some reason, the industry, particularly multinationals believe they must earn in a year an average return in India at least 200% higher than what they do globally.

A large part of these earnings is directly attributable to the fact that India's consumers are charged - before GST and dealer margins - up to 25% more for often lower spec vehicles, than what international consumers pay. A fairly significant portion of the profits also arise from practices that would be considered unacceptable by trustbusters in most developed countries. But the latter issue is a Pandora's box that I shall deal with, at length, another time. Let me, for now, confine my attention to the issue of vehicle pricing and GST restructuring.

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Over the years, auto manufacturers have started offering a range of variants of every model, differentiated primarily by marginal tweaks in aesthetics or the addition of minor bells and whistles, and have then played with supply levers and advertising support to ensure that the highest margin variants are the ones most readily available, and have cleverly guided consumer demand towards them.

But this is a free market isn't it, and the government or a regulatory authority ought not to meddle with it. How then can the government ensure that its citizens are not taken for a ride in and get the same deal as their global counterparts for a given technology and spec level, in markets of a similar size? A part of the answer to that question may well lie in a restructuring of the automobile GST regime.

Today's GST on automobiles is essentially a carry forward from the Central Excise/MODVAT regime of the past. Consider how it evolved into its present form. Thanks to a peculiar set of circumstances the government in its infinite wisdom, apparently impressed by Japan's Kei car taxation treatment decided to create a regime that appeared primarily to encourage the manufacture of small cars.

The logic proffered at that time was that a differential excise tax structure would act as a major boost to small car sales and therefore production, and the resulting large volumes would make India-made small cars, cost-competitive for global markets. India, it was proclaimed, would then become the small car manufacturer for the world, with a huge resulting benefit to the auto components manufacturing sector as well. Without a doubt, the components manufacturing sector did receive a major fillip from the rapid growth of the small car market.

But for the large part, car manufacturers failed to deliver. The largest volume manufacturer remained rooted in its comfort zone of low technology and relatively high-priced cars for Indian consumers. Just one company seized the opportunity and India made small cars started getting shipped abroad in consistently large volumes and even went to every country in Europe including Germany. Cocking a snook at the competition, that company had its first batch exports to Western Europe flagged off by the then Chairman of the National Manufacturing Competitiveness Council - and the past chairman of its largest competitor in India.

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The change in the excise tax regime, however, came with an interesting twist. Quite like the Japanese stipulation on engine size not being the only determinant of tax levied, the Indian law added the Over All Length (OAL) of the car as an additional qualifier. Of course, it did not copy the Japanese Kei car definition in toto, and instead of the 3.4M OAL definition (which would have been seen as more blatantly than usual 'made for Maruti'), the government decided that all cars with an OAL of less than 4M would qualify for the preferential tax rate.

Then in a dose of rather confounding arbitrariness, Government also laid down a rule that cars seeking the preferential tax rate ought to have an engine size below 1.2 L displacement if the fuel was petrol, and below 1. 5 L displacement, if it was diesel! The logic on engine stipulation would have been irrefutable had the government had spoken of fuel efficiency norms or perhaps emission norms. But that was not to be. The policy appeared clearly designed to support just one company in the fond hope that this largesse would have created a national champion capable of global conquest.

Of course, nothing of that sort happened, and after that company's much-publicised but completely forgettable foray into developed markets, those hopes evaporated entirely. What the excise regime did however achieve was to effectively mask and worse, reward inefficiencies in design, technology, quality and production systems. (Markets are, however, unfortunately, less forgiving.) It also essentially enabled the efficient firms to use the price-lines set by the less efficient to garner super-profits for themselves. (Recommended reading for: Microeconomics 101.) Despite all that, the approach to taxation has continued almost unchanged.

So today you have the paradoxical situation where some car model variants from the

In the circumstances could we perhaps consider the following rationalisation of the GST regime: peg the GST rate on just two things - retail/sticker price for one and fuel choice for the other. We could perhaps start with a base slab for petrol cars with a retail price below INR 5 lakhs, and charge them a GST rate of 28%.

Diesel cars in the same category could be charged an additional levy of 3%. In the next slab, petrol cars with a retail price of INR 5.01 lakhs to INR 10 lakh could be charged a GST rate of 35%, adding a further 3% for diesel cars. For petrol cars in the retail price range of INR 10.01 lakhs to INR 15 lakhs, GST could be pegged at 40% with a 5% addition for diesel cars.

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Then for petrol cars in the retail price range of INR 15.01 lakhs to INR 20 lakhs, GST could be pegged at 45% with a 5% addition for diesel cars. The next slabs could probably be INR 20.01 lakhs to INR 30 lakhs, one above INR 30.01 lakhs with a progressive tax rate.

What could the impact be? At the risk of sounding like a crystal-ball gazer, I would venture to suggest the following plausible scenario: Tata and Mahindra models could suddenly become extremely attractive to Innova's mainstay - the core commercial-use vehicle market; the Maruti Ertiga and the soon-to-be-launched Kia Carnival could add further to the downward pressure on prices and Toyota could immediately get more realistic and less greedy with its pricing.

As a result, long-delayed replacement cycles in the commercial-use sector and revival of the buying cycles in the personal use segment could be triggered, leading to volume growth. Imagine something similar happening in the Honda City/Hyundai Verna/Maruti Ciaz segment, or the Hyundai Creta/Renault Captur /Jeep Compass/Kia Seltos/Maruti Brezza segment.

For those in any doubt at just how low prices can really go as a result of competition, recall the prices of the GM Captiva (you'll have to check on the internet, it was really quite some time back) and compare those with what the vehicle, now manufactured by the Chinese major SAIC and eloquently rebadged as the MG Hector for India, is priced at.

Then perhaps, as corporate avarice is replaced by reasonable expectations of profit in line with global standards, car price levels more in line with global norms would ensue, and the welfare of Indian citizens, rather than multinational corporations would take centre-stage. The likely resultant revival of sales and production in the auto industry would, in turn, spur economic activity in some areas and could be one part of an overall economy revival process. It is my sincere belief that this is the avowed direction of Government policy.

The linking of GST rates with retail prices could put paid to any thoughts of (mis)adventurism that elements in the industry might entertain, and could well set standards for responsible corporate behaviour. (Yes, I am a dreamer!!)  Imagine, then taking this model to the tractor industry, and see how much good it does to the agricultural/rural economy - all directly translatable into voter support. I could go on. But I run the risk of being labelled an irresponsible anarchist. So perhaps I should focus on my promise of opening up the Pandora's box.

Watch this space!!

(The writer is former President of Hyundai Motor India who manages a boutique strategy advisory firm Beyond Visual Range. He also authored 'Santro - The Car That built A Company'.)