CORPORATE Automotive industry hopes for the best from GST regime
The automotive industry, including component manufacturers, vehicle manufacturers, and dealers, hopes for the best from the Goods and Services Tax (GST), India’s biggest economic reform since independence. It will change the country’s tax regime when approved by the President. Once approved, it will be implemented from April 1, 2017.
The first step for the implementation of GST is the setting up of the GST council. It will comprise the State finance ministers and the Union finance minister. This council will decide on the tax rate under GST, the revenue threshold below which traders will be exempted from the levy and also the administrative processes under GST. However GST rates will be the key. The GST rate is likely to be in the range of 18%.
With the present tax system, the automotive industry has been facing many hardships like the inverted duty structure for tyre manufacturers, the exorbitant customs and excise duty rates on motor vehicles, and the cascading effect of taxation on the dealers. All these inflated prices for the end-consumers affects sales growth. GST is expected to address many of these issues.
One tax rate, one market
Tax analysts have pointed out that for the automotive industry, GST will usher in 1 tax rate for the country which will become 1 market. With GST implementation, taxes levied by the Centre, like excise duty, and the State- level taxes like sales tax, road and registration tax, would all be subsumed into one.
If the proposed tax rate is around the expected 18%, vehicle prices are expected to come down and become more affordable and generate more demand. It is not yet clear whether there would be a dual tax structure for small and big cars.
After GST, from the Indirect tax perspective, the whole country will be treated as one market’. The logjam at check post, etc. will get eliminated. This would increase the overall economic activity, spur GDP growth that would push demand for vehicle across categories. Impact of Tax cascading will go away that will reduce overall cost of vehicle manufacturing. All taxes on input paid will be offset with the output liability of GST.
The Society of Indian Automobile Manufacturers (SIAM) look forward to the introduction of GST. Based on the available data regarding the provisions of GST, SIAM has suggested that all kinds of domestic indirect taxes should be subsumed in the proposed GST, as suggested by the Kelkar Committee. This should include Road Tax/Motor Vehicle Tax also. SIAM wants to have provision in the GST law that no new levy or tax will be introduced.
Any change, if required, in future (for specific needs like calamity, education, infrastructure, etc.) should be done through modifying the rate of taxation under the GST regime and not through any additional levy/tax/cess, etc. SIAM has also proposed to bring the trade in used vehicles under the
GST framework with a token levy to make it more organised.
Vishnu Mathur, Director General, Society of Indian Automobile Manufacturers (SIAM)
“It is very good news for the industry. We have been hoping that GST would be implemented. It is certainly going to reduce our overall cost structure. Finally, we are going to become a one- single market. So it is definitely going to give a boost to the economy, maybe by 1 or 1.5% growth to the overall GDP. I think the automotive sector will be one of the most positively impacted sectors. At present, we have multiple rates of excise duty. With the GST coming in, we are hoping we do not see more than 2 rates. So that will be also a very positive development as far as our industry is concerned, which we believe is very, very highly taxed. While we haven’t seen the GST rate yet, whatever comes will certainly be lesser than cumulatively what it is today.”
Arvind Balaji, President, Automotive Component Manufacturers of India (ACMA)
said, “We are delighted that the GST bill has been passed by the Rajya Sabha. This will pave the way for the creation of ‘One India market’ by ending the multiplicity of taxes, which often leads to a cascading effect. It will also give a fillip to the Indian economy and the government’s agenda of ‘ease of doing business’. We look forward to a faster implementation of GST.”
Sohinder
Gill, Director- Corporate Affairs, Society of Manufacturers of Electric Vehicles
said, “GST is a major step taken by the government as it intends to turn India into 1 common market which will lead to ease of doing business.”
Rohit Saboo, President & CEO, National Engineering Industries
Ltd, has said that “GST is going to bring positivity in the auto and auto components industry and we can expect consolidation of manufacturing facilities and flexibility in the distribution. Swift and error-free implementation will be the key to its success.”
Made in India
With respect to taxation and duties, cars are classified into 4 categories – small cars with petrol engine capacity below 1,200cc and under 4 metres in length, mid-size cars with petrol engine below 1,200cc and diesel engine below 1,500cc, luxury cars with engine capacity of 1,500cc and above, and SUVs with engine capacity above 1,500cc, 170mm of ground clearance and longer than 4 metres.
For small cars, a total tax of around 28% is levied currently which includes VAT and excise duty while for mid-size cars, it’s around 39%. If the 18% GST gets implemented, then taxes on small cars will reduce by 10% while taxes on mid-size cars will reduce by a significant 21%.
RC Bhargava, Chairman, Maruti Suzuki India
commented, “We all wanted the GST Bill and finally it is coming. In terms of advantages, it creates a single market in India. Today the market is broken up with states having their own taxes and own laws so they function as state markets and are separate islands. Now India can go back to being a single market. In terms of cars becoming less costly, the GST rates are not yet known so it is too early to say. GST will not lower costs of manufacturing much but it will make logistics better.”
It appears that the GST implementation will favour those automobile companies who manufacture their products in India. The locally manufactured vehicles are likely to get a cost advantage owing to lower taxation. For automobile companies relying on the
CBU route, there won’t be any benefit.
Yadvinder Singh Guleria, Senior Vice President, Sales and Marketing, Honda Motorcycle and Scooter India Pvt Ltd
said, “The GST is definitely one of the most important tax reforms in the history of India which was closely tracked by each and every one in this monsoon session of Parliament. The new simplified and uniform tax structure will reduce the cascading effect of tax-overtax and provide a 360-degree easeof-doing business for the complete automobile ecosystem, be it suppliers, manufacturers, dealers and most importantly customers who will get the benefit.”
The Challenge
Industry analysts have pointed out several challenges the automotive industry could face even after GST and problems that could make business difficult if not clarified unambiguously. A major issue could be the possible valuation disputes. The automobile industry has seen significant disputes under central excise valuation like: Sale below the cost for market penetration, inclusion of State industrial promotion subsidies retained by the manufacturer, deductibility of post-sale discounts from value under excise, valuation of demo cars, treatment of PDI charges and other dealer reimbursements, advertisement charges recovered from dealers etc., and sales through marketing companies and mutuality of interest. The Model GST law continues with the concept of ‘transaction value’ which is a welcome measure however the powers for rejection of the transaction value are very wide, and could lead to significant valuation disputes. It is proposed that there should be more clarity in the conceptual framework for job work, the backbone for automobile industry operations, though the Model GST law treats ‘job work’ as a service and seeks to maintain existing excise procedures for the job work transactions, i.e. non-taxability of job work transaction and providing credits to the principal for supplies to job worker, 180 days condition for bringing back goods after job work.
Clarification is sought on other issues like credits on vendor tooling, time of supply for payment, dealer incentive schemes, and input tax credit. Proper GST administration and dispute resolution (more importantly on inter-State transactions) is very critical apart from a competitive GST rate.
Tax rates
SIAM has suggested that the tax rates under GST should be uniform across the States and there should be 1 authority to which payment would be made by way of 1 challan. It wants that the tax rate on inputs and output should be fixed considering the pattern of input purchase and output sales which varies considerably. This has implications for the input tax credit. While vehicle manufacturing takes place in a few States with supply to other States (local sales account for less than 10% of total domestic sales), majority of components (around 70% - 80%) are procured from vendors within the State.
If tax rate of components/inputs is more than the tax rate at the time of supply of complete vehicles (Completely Built Units), then refund would arise. Hence, to avoid that, it is suggested that uniform rate of tax should be charged on complete vehicles (whether by way of sale or by way of transfer) and inputs, against which input credit should be allowed.
Another proposal is that the tax paid on complete vehicles on movement from factory should be made available as input credit to the vehicle dealers, and considering the current level of taxation, a suitable tax rate may be adopted.
Stock transfer
In the proposed GST system, it is not known whether stock transfer would remain exempted from tax (at present, sales tax is not levied on stock transfer) or would be made taxable in the importing state. SIAM has sought clarification on the treatment of stock transfers for input tax credit.
There should be no distinction between input and capital goods. Presently, definition of Capital Goods under Central excise law and state VAT is not uniform. Under State VAT, definition of capital goods and also the rate of taxation vary from State to State. As regards periodicity of taking credit, excise and VAT laws differ.
In respect of existing exemptions having sunset clause, appropriate transitional provisions should be introduced to ensure their continuity. A clarification is needed on how the existing sales tax benefit schemes e.g. loan, deferral would be affected.
The State Goods and Services Tax Act, State GST Act, should be a common Act operated/ implemented by all the States and Union Territories (similar to present Central Sales Tax Act) covering transactions related to goods, services and exports. Concept of ‘Tax Invoice’ should be continued for availing State GST credit.