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Impact Of GST On Automobile Sector

The Covid -19 pandemic has resulted in the truncation of consumer demand in the short run and is also expected to change long-term consumer preferences moving it away from luxuries.

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India Has A Diverse automotive industry ranging from two to four wheelers as well as commercial vehicles with a steady advance towards electrification. India is one of the largest vehicle manufacturers in the world in automobiles, being the largest manufacturer of two-wheelers, three-wheelers and tractors. Thus, the automobile sector is a vital contributor in the Indian economy. Earlier various taxes such as sales tax, road tax, sector tax, VAT, motor vehicle tax, registration duty, etc. were in place which have now been subsumed under GST (Goods and Services Tax). In this article, we will analyse the impact of GST on the automobile sector. 

Positive Impacts of GST on the Sector 

The introduction of GST has led to various affirmative influences on the automobile sector. In the erstwhile taxation regime, dealers could not claim the credit of Excise duty, CST, and various cess which was paid earlier, thus inflating the purchase price of the vehicle. In GST regime, CGST (Central Goods and Services Tax), SGST (State Goods and Services Tax), and IGST (Integrated Goods and Services Tax) paid will be fully available as credit to the dealers dealing in further supply of vehicles, thereby they will not add to the purchase price of the vehicle. In other words, the GST has eliminated the cascading effect of taxes, and thereby reducing the price of automobiles. 

Under the previous regime, automobile parts, accessories and components manufacturers were charging excise duty on MRP value based abatement wherein the duty portion would be paid on the value higher than the transaction value, this lead to higher excise cost on the spare parts and accessories procured by dealers. Since this concept is not continued in GST, such additional costs has come down. 

Another benefit of “One Nation, One Tax” is now the tax rates are same across the country. Thereby, state level tax arbitrages for a consumer are things of the past. This has reduced incidences of tax evasion which occur due to consumers buying vehicles from the states other than where they reside. Earlier, car dealers used to deliberately open delivery showrooms in states with lower taxes whereas sales showrooms were available at the point of sales. With GST coming in place, practically speaking, the necessity of dual showrooms lost charm and further lead the sector to merge the delivery showrooms and point of sales showrooms. 

Before 1st July 2017, Central Sales Tax (CST) was levied when there were interstate sales, and credit on the same could not be claimed for the payment of output VAT. This issue is now eliminated with IGST being applicable to inter-state sale of goods or services, credit of which is easily available. Hence, there was a massive cost saving on account of elimination of CST. Further, input tax credit on various other operating overheads such as advertisement, promotion, rent, etc. can now be claimed by the sector, which helped in rationalisation of the operating cost. 

A big relief under GST was that the law provides for the exclusion of subsidy provided by the Central Government and the State Government from the transaction value. Thus, the manufacturers of the electric vehicles who enjoy huge subsidies from the government will also save massive tax cost, which would, in turn, be passed on to the consumers. Thereby, in case, any electric vehicle has a government subsidy, then GST would be charged on transaction value excluding the amount of subsidy. This provision is embedded in clear and unambiguous terms in GST law itself, which has an effect of ironing out any interpretation issues. 

Dis-advantages of GST on the Sector 

On the flip side, under GST, tax is to be charged on vouchers or warranty cards issued to the customer as a part of after-sales services. GST has to be paid at the time of issue of the vouchers or warranty cards on the money value of the goods or services or both redeemable against the vouchers or warranty cards. Thus, working capital to the extent of tax would be blocked at the time of issue of the vouchers even though they are redeemable at a later date. 

Under GST, discounts will be excluded from the value of supply only if they are included in the invoice or it is provided as a consequence of an agreement executed either before or at the time of supply. In the automotive industry, it is a normal practice for the manufacturers/ importers to give post-sales discounts to the dealers whilst the dealers also offer promotion schemes to the customers. These discounts are seasonal and would not be linked to specific invoices. Thus, this would also pose considerable problems during taxation. 

Under the GST regime, automobile dealers and manufacturers charge an amount for the sale of vehicle, and other ancillary services such as insurance, accessories, etc. Taxation of these supplies would be a big challenge in the future keeping in differential tax treatments for composite supply and mixed supply. This would be an area for litigation in the future, as uptill now no clarification has been issued by the GST policy wing for the automobile industry and its various sale packages. 

Conclusion 

Introduction of GST has spawned a worthwhile impact on the automobile sector. Inspite of the certain blockages in the working capital caused due to the regulations, elimination of the cascading effect of taxes, incessant flow of credit, reduction in the number of taxes have caused an overall positive impact in the industry. However, this sector has been severely hit by the impact of Covid-19. 

The Covid -19 pandemic has resulted in the truncation of consumer demand in the short run and is also expected to change long-term consumer preferences moving it away from luxuries. Companies are expected to take strategic decisions and exit unprofitable local markets and significantly lower output as manufacturing capacity is being consolidated. Building up of unsold inventory would lead to the accumulation of tax credit, which would result in lowering GST contributions to the exchequer. Financial Year 2020-2021, would be one of the worst years for the automobile sector as the demand would bottom out and the government is not in the favour of rationalising the tax rates which could help bring back the demand in the sector.  

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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automotive industry magazine 7 Dec 2020 gst iGST

Rajat Mohan

The Author is a Senior Partner with AMRG & Associates

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