Banks Face Car Loan Cancellations Ahead: As the September 22 deadline for the Goods and Services Tax (GST) rate reduction approaches, banks in India are witnessing a notable surge in car loan cancellation requests. This trend is driven by the anticipation of lower vehicle prices resulting from a substantial cut in the GST rate on passenger vehicles. Industry experts say this shift could reshape the car financing landscape and impact bank strategies in the short term.
GST Rate Cut: Key Changes in Taxation
During the 56th GST Council meeting earlier this month, a significant decision was made to reduce the GST rate for cars with engine capacities up to 1,200 cc from 28% to 18%. This change is part of a broader tax restructuring that will see around 400 products—including soaps, shampoos, tractors, and air conditioners—becoming more affordable as the rejig takes effect from September 22, coinciding with the first day of Navaratri.
The tax revision is designed to ease the financial burden on consumers and stimulate demand across various sectors, particularly the automotive industry, which has seen a slowdown in recent months.
Rising Car Loan Cancellations
Why Borrowers Are Canceling Loans
A senior official from a public sector bank revealed that customers who had already secured car loans are now approaching branches to cancel their approved loans. The primary reason is strategic: borrowers want to purchase their vehicles after the GST rate cut comes into effect, benefiting from lower prices and a reduced loan amount requirement.
The cancellation charges levied by banks are relatively minimal compared to the expected savings on the vehicle purchase. Consequently, many borrowers are opting to undergo the fresh loan approval process post-September 22, maximizing their financial advantage.
Impact of Shradha Period and Deferred Demand
Another contributing factor to the slowdown in car sales and the rise in loan cancellations is the ongoing Shradha period, which lasts until September 21. This traditional observance often causes prospective buyers to postpone significant purchases, including vehicles.
Additionally, some customers are now exploring better versions of cars under the 1,300 cc category to take advantage of a 10% GST benefit, further contributing to the trend of delaying purchases until the new tax structure is active.
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Important Guidelines for GST Benefits
According to the Central Board of Indirect Taxes and Customs (CBIC), the new GST rate applies only if the invoice has not yet been issued by the car dealer. Should the invoice already be in the system, the old 28% GST rate remains applicable. Therefore, prospective buyers should ensure that the invoice is generated after the cut-off date to avail of the revised tax benefits.
Financial Implications of the GST Revision
Lapse of Accumulated Cess
An estimated Rs 2,500 crore of accumulated compensation cess on auto companies’ books is expected to lapse on September 22, when the new GST rates come into force. Presently, automobiles attract a GST rate of 28% plus a compensation cess ranging from 1% to 22%, based on vehicle type.
Post-revision, petrol and diesel cars with engine capacities up to 1,200 cc and 1,500 cc will now attract only 18% GST, while vehicles above this capacity will face a higher GST rate of 40%.
Long-Term Industry Outlook
CBIC Chairman Sanjay Kumar Agarwal highlighted that industry concerns over cess accumulation have been raised through various representations. While the immediate impact is a surge in cancellations and deferred demand, experts predict a gradual market stabilization once the new rates are in place.
Conclusion: What Consumers and Banks Should Expect
The impending GST rate cut on passenger vehicles is driving significant behavioral changes among car buyers and financial institutions. Banks face a temporary challenge of handling increased cancellation requests, but the long-term expectation is a market rebound driven by more affordable vehicle prices.
For consumers, the strategy of waiting until September 22 to make a purchase proves financially beneficial, particularly in securing lower loan amounts and interest payments. However, they must ensure that the invoice is generated post-GST cut-off to fully avail the tax benefits.
Financial experts advise borrowers to stay informed and carefully plan their purchases during this transitional period. Banks, meanwhile, may need to adapt their loan processing strategies to accommodate this surge in loan cancellations and reapplications.
The revised tax structure is set to not only reduce vehicle costs but also reshape the car financing landscape, presenting an opportunity for both consumers and banks to realign their strategies effectively.
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FAQ – GST Rate Cut and Car Loan Cancellations
1. Why are car loan cancellations rising before September 22?
Car loan cancellations are rising because consumers aim to benefit from the upcoming GST rate cut on passenger vehicles. The reduction from 28% to 18% lowers the vehicle price and consequently the loan amount needed, making it financially smarter to wait until the new tax rates are effective.
2. How does the GST cut impact car prices?
The GST cut applies to petrol and diesel cars with engine capacities up to 1,200 cc and 1,500 cc, reducing the tax from 28% to 18%. This significantly lowers the total tax incidence on the vehicle, leading to cheaper purchase prices and making car ownership more accessible for consumers.
3. What happens to existing car loan approvals?
Customers with pre-approved loans can cancel them, often at a minimal cancellation fee, and reapply after September 22. Since the GST rate will be lower after that date, a fresh loan will likely have a reduced principal and better terms.
4. Can consumers avail of the new GST rate if the invoice is already issued?
No, the new GST rate will apply only if the invoice is issued after September 22. If a dealer has already issued the invoice, the old GST rate of 28% remains applicable.
5. What should buyers be cautious about during this period?
Buyers must ensure that the invoice is dated after the GST cut-off date (September 22) to benefit from the lower tax rate. They should also confirm cancellation terms with their banks and factor in the Shradha period, during which purchases are traditionally deferred.
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