Impact Of GST On Automobile Sector

India has a diverse Automotive Industry ranging from 2 wheelers to 4 wheelers as well as commercial vehicles, and steadily it is advancing towards electrification. India is one of the largest vehicle manufacturers in the world, 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 imposed which have now been subsumed to GST.   

In this article, we will analyze the impact of GST on the automobile sector.

Gains of GST to 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 the GST regime, CGST, SGST, and IGST paid will be fully available as credit to the dealers dealing in further supply of such vehicles, thereby they will not add to the purchase price of the vehicle. GST has eliminated the cascading effect of taxes thereby reducing the price of the automobiles. The below tables describe the impact of GST on purchase cost:

Table 1: Pre GST Purchase Cost

Table 2: Post GST Purchase Cost 

Under the previous regime, automobile parts, accessories, components manufacturers were charging excise duty on MRP value less 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, accessories procured by such dealers. Since this concept is not continued in GST, such additional costs have come down.

Another benefit is “ONE NATION, ONE TAX”, that is to say, now the tax rates are the same across the country. Thereby state level tax arbitrages for a consumer are things of the past. Thus, this has reduced incidences of tax evasion which occur due to consumers buying vehicles from the states other than where they reside. In the erstwhile regime, car dealers used to deliberately open delivery showrooms in states with lower tax and sales showroom was available at the point of sales. With GST coming in place practically speaking necessity of dual showrooms lost charm and lead the sector to merge delivery showrooms and point of sales showrooms.

Before July 1st,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 and Integrated Goods and Services Tax (IGST) is applicable to the inter-state sale of goods or services, credit of which is easily available. Hence, there was a massive cost saving on account of the elimination of CST. Further, Input Tax credit on various other operating overheads such as advertisement, promotion, rent, etc can now be claimed by sector, which helped in the rationalization 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 State Government from the transaction value. Thus, the Manufacturers of electric vehicles who enjoy huge subsidies from the Government will also save massive tax costs, which would, in turn, be passed on to 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.

Apart from the manufacturing and dealership industry, a major benefit is also provided to the second-hand automobile industry as tax is allowed to be paid only on the margin i.e. selling price less purchase price of the vehicles, provided ITC had not been availed on the purchase. This provision has rationalized the tax rate in the case of the secondary market, which has till now remained as an unorganized sector due to taxation. With this lower taxation benefit, car dealers in the secondary market are slowly moving towards the organized sector. This sub-sector of the automobile industry has a great potential to unlock the value of old and used cars in the market. 

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 the 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 the 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 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 vehicles, 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 up till now no clarification has been issued by the GST policy wing for the automobile industry and its various sale packages.

Conclusion:

The introduction of GST has spawned a worthwhile impact on the automobile sector. In spite 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 has caused an overall positive impact in the industry. However, this sector has been severely hit by the impact of COVID-19. COVID -19 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 rationalizing the tax rates which could help bring back the demand in the sector.

Rajat Mohan

Guest Author The Author is a Senior Partner with AMRG & Associates