NEW DELHI: The upcoming goods and services tax (GST) reduction would drive the long-term auto demand and job creation in India, HSBC Global Investment Research said on Monday.

The government is looking to simplify the GST slabs in India and slab for 28 per cent may be reduced to 18 per cent and the cess imposed on top of GST rates on automobiles may be discontinued as well.

Passenger vehicles (PVs) generate $14-15 billion in GST collection, and two-wheelers $5 billion.

“The specifics are unknown so far, hence we look at various scenarios and highlight company-level exposure to various GST rates and a framework for investors to evaluate the relative benefit across OEMs,” said the report.

Currently in PVs, the GST ranges from 29 per cent to 50 per cent as a cess is imposed on top of GST based on size (cc and length) of the vehicle. In the new regime, the government may reduce the tax on smaller cars to 18 per cent (from 28 per cent) and for bigger cars move them to a "special rate" of 40 per cent and cancel the cess on top of GST,” the report suggested.

This would mean for smaller cars, prices may come down by 8 per cent and for bigger cars, in the range of 3-5 per cent.

“In this scenario, OEMs like Maruti Suzuki India Ltd (MSIL) would be a key beneficiary due to higher exposure to small cars (68 per cent volumes in 28 per cent category). For M&M, the proposed GST reduction is a tailwind as well, though it is at a relative disadvantage due to higher exposure to EVs,” the report maintained.

Flat reduction from 28 per cent to 18 per cent across size of cars and everything else remains the same is a simplified regime, though a less likely scenario where the basic GST may be reduced from 28 per cent to 18 per cent and rest of the cess imposed on cars based on the size of vehicles remains the same.

“In this scenario, all vehicles across categories benefit with around a 6-8 per cent reduction in price. A flat 10 per cent cut would mean the government absorbs a revenue hit of around $5-6 billion,” the report noted.

Flat reduction from 28 per cent to 18 per cent across size of cars and discontinuation of cess would significantly simplify the tax structure but a very unlikely scenario as it would be a significant impact on government revenues (around half of GST revenues would be hit).