Here's why Mahindra will be impacted the most with hike in GST cess

Key highlights:

• Union Cabinet is expected to soon consider the GST Council's decision to increase the GST cess on large cars
• Mahindra to be impacted the most due to its large exposure to these segments
• Nearly 40% of Mahindra's vehicles belong to the utility vehicles portfolio

While the hike in the goods and service tax (GST) cess will hit manufacturers of SUVs, luxury cars and other large cars, the most to be hit by this is Mahindra & Mahindra (M&M), according to analyst Ashvin Shetty said in an Ambit Capital report.

The Union Cabinet is expected to soon consider the GST Council's decision to increase the cess on mid-size and large cars to 25% from the 15% cess currently. This is expected to increase the tax on cars to even higher than the pre-GST levels.

The government had earlier kept a GST of 28% plus an additional cess of 15% on cars above 4 meters. This had reduced the tax incidence to the extent of about 5% for mid-size cars to about 12% for SUVs.

This had led to a reduction in the prices of all these cars as they passed on the benefits of GST to the customers.

However, the GST Council, at the start of the month, seeing this decided to increase the cess to 25% from the current 15%.

“We believe any increase due to the higher cess will also be passed on. Hence, we do not see any hit on margins,” says Shetty.

Shetty adds that, however they could be some volume impact due to the price hike and that they expect Mahindra to be impacted the most due to its large exposure to these segments.

This is as Mahindra is the most exposed to the SUV segment. Nearly 40% of Mahindra's vehicles belong to the utility vehicles (UV) portfolio. This will be impacted as when the government increases the GST cess the sales of the vehicles could decline significantly.

The GST Council on August 7 had taken the decision to increase the cess on these cars to 25% from the 15% cess earlier charged on them. The Finance Ministry had tweeted that the Central Government may move legislative amendments to increase the maximum ceiling of cess on motor vehicles to 25% from the present 15%.

Earlier the GST Council had decided on a cess of 15% in addition to the 28% GST rate, taking the total tax on luxury cars to 43%. In addition to this there are State GST taxes. However, this was much lower than the previous tax rate of 47-55% depending on the State taxes, which resulted in a reduction in prices of car makers.

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