How GST Will Change Car Buying Behaviour

Observers of Consumer Behaviour can look forward to interesting changes in consumer buying behaviour in India now that GST is going to become a reality. In particular, car buying behaviour.

Passenger vehicles in India are currently taxed at four different excise rates, in addition to Value-Added Tax (VAT) and cess, depending on their length and engine size. Effectively, the tax rate on small cars, less than four meters in length, works out to 24.2%. In the case of sedans with engines upto 1500 cc, the tax works out to 36.2%, while those with larger engines are taxed at 39.05%. Effective tax for premium sports utility vehicles (SUVs) and luxury cars works out to 42.5%.

Understandably, seven in ten models sold in India are either hatchbacks or sub-four metre sedans/SUVs because planning has been skewed in favour of the sub-four metre vehicle. A concept that owes its origin to the current excise duty structure that favours such cars and is unique to the Indian market! 



A trend that began with the Indigo CS and which even a global player like Volkswagen followed with the launch of its Ameo. 
  

A trend that have made sub-four metre SUVs the seasons hottest trend!


The suggested tax structure under the model GST law proposes just a dual duty structure—18% for non-luxury cars and 40% for luxury cars! If this gets passed, compact cars (including hatchbacks and compact sedans) will be cheaper by Rs.30,000-35,000, while the price of sedans may fall by nearly Rs.1 lakh! So one may see a slowdown in passenger vehicle sales as buyers will tend to postpone purchases, anticipating a price reduction in the first quarter of 2017-18.

Even if the government, hypothetically, goes with a dual slab of 18% and 24% for cars in the mass segment, the excise duty gap that exists today between the hatchback/compact sedan and a full-size sedan is likely to come down to 6% from the current 12%. This will narrow the price difference between the two segments. 


It may also mean that buyers may no longer see merit in compromising and going for a hatchback/compact sedan but instead may prefer buying a full-size sedan. 

Or better still a more premium full-size sedan.







What this actually means is that cars have a premium positioning in the market will benefit from the unified tax structure. 

That said, all car marketers have their fingers crossed... knowing that the smart Indian car buyer is rubbing his hands gleefully in anticipation.