New Delhi [India], August 29 (ANI): The Indian automobile industry is expected to receive a major demand push as optimism builds over a potential Goods and Services Tax (GST) rate reduction, according to a recent report by Jefferies.

The proposed tax rationalization, likely to be announced early next month is likely to benefit two-wheelers (2Ws) and small passenger vehicles (PVs) the most.

According to the report, the GST rate cut, anticipated to reduce tax slabs from 28 per cent to 18 per cent for most vehicles and from 12 per cent to 5 per cent for tractors, could lower on-road prices by 6-8 per cent. 'This would significantly improve affordability and support demand recovery,' Jefferies said.

The funding mechanism for this cut includes converting the 'GST Cess' on items like tobacco, coal, SUVs, and aerated beverages into GST and adding new items under the tax net.

Two-wheelers, currently taxed at 28-31 per cent, and sub-4 meter cars, which attract around 29-31 percent tax, are expected to gain the most. Large SUVs, presently taxed at 45 to 50 per cent, could see some relief as well, with effective rates potentially coming down to 40 percent.

Tractors may benefit from a reduction in GST from 12 per cent to 5 per cent, though this could lead to an inverted duty structure due to higher input costs says the report.

The report noted that a 7 to 10 per cent GST reduction could lead to a substantive uptick in consumer sentiment.

'Hybrid vehicles, currently taxed at similar rates as internal combustion engine (ICE) vehicles by most states, could also see strong demand if rates are rationalized closer to battery electric vehicles (BEVs), which attract only 5 per cent GST,' the report highlighted.

Jefferies raised its FY26-28 industry volume estimates for 2Ws and PVs by 2 to 6 per cent, forecasting a compound annual growth rate (CAGR) of 10 per cent for two-wheelers and 8 per cent for PVs over FY25-28.

Tractor sales are expected to maintain a 9 per cent CAGR, while trucks are seen growing at a slower rate of 3 per cent.

The auto industry has seen muted demand in recent months, with April-July registrations growing only 2 to 3 per cent year-on-year for 2Ws and PVs.

However, Jefferies expects momentum to pick up in festival season amid the tailwinds of income tax cuts, easing liquidity, and the likely GST reduction. (ANI)