GST For Tractor Industry: Overall Tax Incidence To Remain Neutral

The Goods and Services Taxes (GST) for the Indian tractor industry is largely in line with expectations and the overall tax incidence for the industry remains neutral, informed Indian credit ratings agency ICRA in an official statement.

While the overall tax incidence remains effectively same, tractor original equipment manufacturers (OEMs) would have to claim a refund from the government, since the input tax credit would exceed the effective tax on tractors. Thus, the working capital requirements of the tractor OEMs would increase marginally and would depend upon timelines decided by government for the refund mechanism.

The implementation of GST, however, provides the OEMs with an opportunity to benefit from operational efficiencies such as rationalisation of inventory, as a result of consolidation of warehousing facilities.

While tractors are exempt from excise duty, tractor inputs continued to attract taxes, which are absorbed by the OEMs in the absence of an option to set off the input taxes (as a result of excise exemption on final product). The tractor OEMs currently absorb taxes of 12-13 percent on most input components (excise & value added tax (VAT) such as engine, transmission, driveline, wheel rims, sheet metal fabrication, seats etc.

Since the component costs inclusive of all taxes currently amount to about to 65-70 percent of the dealer price, the effective tax incidence relating to inputs amounts to 8 percent. The tax incidence on inputs combined with VAT on final product takes the total tax incidence for the industry to levels of 12-13 percent, added ICRA.

Subrata Ray, Senior Group Vice President, ICRA, said, “With the GST rate for input components being fixed at 28 percent, higher than the current taxation structure, the total tax incidence relating to inputs is estimated to increase."

"However, since the manufacturer can claim input tax credit, the fixation of a GST rate of 12 percent on tractors would allow the OEMs to take credit of the cumulative input duties and taxes. Thus, the total tax incidence of the industry would remain at broadly similar levels and its implementation is neutral for the tractor industry.”