ABSTRACT: The Automobile industry in India is one of the most successful manufacturing space from past liberalization. The industry has potential to grow to become a major economic contributor.
The Government of India has also recognized the
importance of Automobile industry holds in the Indian economy and hence is currently working on Automotive Automotive Mission Plan 2026 to set targets for the industry for the year 2026. The Government of India has planned to implement of GST to the manufacturing manuf acturing sector in India. I ndia. The objective of this study is the impact of GST on Automobile sector in India.
CHAPTER:-1 INTRODUCTION Automobile sector in India is growing fast and the growth pattern seems to have a clear correlation with the reforms related policies those influenced both domestic demand pattern as well as trade. India is global major in the two wheeler industry producing motor cycles, scooters and mopeds principally of engine capacities below 200cc. The two wheeler industry in India has grown at a compounded annual growth rate of more than 15% during the last five years and Indian two wheelers comply with some of the most stringent emission and fuel efficiency standards maintained world wide. In India two wheelers is the second largest producer in the world and the world‟s number one producer is located in
India. India is the largest tractor manufacturer, the fifth largest commercial vehicle manufacturer and the thirteenth largest producer of passenger cars in the world. The Auto industry currently employs more than 30 million people both directly and indirectly. The auto industry is a key employment generator in the OEM factory that manufacturers the vehicles, in the inbound auto component and logistics industry that makes and delivers components & systems and the out bound logistics and dealer network that sells, maintains and distributes the cars. Every vehicle produced,
CHAPTER:-1 INTRODUCTION Automobile sector in India is growing fast and the growth pattern seems to have a clear correlation with the reforms related policies those influenced both domestic demand pattern as well as trade. India is global major in the two wheeler industry producing motor cycles, scooters and mopeds principally of engine capacities below 200cc. The two wheeler industry in India has grown at a compounded annual growth rate of more than 15% during the last five years and Indian two wheelers comply with some of the most stringent emission and fuel efficiency standards maintained world wide. In India two wheelers is the second largest producer in the world and the world‟s number one producer is located in
India. India is the largest tractor manufacturer, the fifth largest commercial vehicle manufacturer and the thirteenth largest producer of passenger cars in the world. The Auto industry currently employs more than 30 million people both directly and indirectly. The auto industry is a key employment generator in the OEM factory that manufacturers the vehicles, in the inbound auto component and logistics industry that makes and delivers components & systems and the out bound logistics and dealer network that sells, maintains and distributes the cars. Every vehicle produced,
generates secondary and tertiary employment. The industry generates employment of 13 persons for each truck, 6 persons for each car and four persons for each three wheeler and one person for two wheelers. It is important to appreciate the sector‟s multipl ier effect on economic
activity. If the industry produces as per its potential, it could generate employment of over 35 million people by 2020.
ABOUT THE GST The GST as the biggest taxation reform and is basically a proposed tax reform at the moment. This is indirect tax much like the VAT, Service tax, entertainment tax, etc. and this would be levied by the state and center in the form of State GST and Centre GST on the manufacture, sale and consumption of almost all goods and services all across India. The auto industry is likely to gain from the implementation of the GST since it is expected to reduce logistics costs by removing trade hurdles, paving way for more competitive manufacturing. The execution of GST will remove the effect of multiplicity of taxes on the cost of goods and services. Currently, most of car manufacturers are located in few of the states in India and by some estimates, 80% of these cars are sold to dealers in states outside the state in which they are manufactured. Moreover, with the effective tax rate dropping to around 18% from up 27% fro some segments currently, it will result in lower prices and consecutively, boost the demand for automobiles with respect
of taxation and duties, cars have been classified into four categories (i) Small cars with petrol engine capacity below 1200cc and under four meters in length, (ii) Mid size cars with petrol engine below 1200cc , (iii) Diesel engine below 1500cc , (iv) Luxury cars with engine capacity of 1500cc and above, (v) SUVs with engine capacity above 1500cc, 170 mm of ground clearance and longer than four meters. On 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% once GST gets
implemented, the total taxes levied on cars is likely to be reduced. The industry requires the Government to support by providing it an atmosphere that facilitates growth. While the auto industry is focused on generating volumes in the different segments to garner growth, it is in the interest of the Government to continue with the lower excise rates as this will help increase volumes and garner additional tax revenue. High tax rates and consequent high prices of vehicles have a harmful effect of lowering volumes, lowering gross tax collections and ultimately lowering growth in the auto sector. The Government should facilitate a conducive environment for growth of the auto industry by defining favorable long-term policy for investment. Due to the unfavorable policy environment in the country where tax rates on vehicles are getting changed every year and Government is negotiating FTAs where custom duties are likely to come
down, many international companies that had planned to enter the market have stalled the plan and are now considering other emerging markets, such as China and Brazil. The industry has potential to grow to become a major economic contributor. The Government also recognizes the importance the automobile industry holds in the Indian economy and hence is currently working on Automotive Mission Plan 2026 to set targets for the industry for the year 2026 and to suggest interventions that would be critical for growth of the industry. The industries identified by the Prime Minister for “Make in India” also include the automobi le and auto component
industry. The Ministry of Finance has laid down the roadmap for implementing Goods & Services Tax (GST) from April 1, 2010 and the Empowered Group of State Finance Ministers on Value-Added Tax (VAT) has accepted the report of the Joint Working Group which suggests a dual GST structure (a central GST and a state GST).
IMPACT OF THE GST ON AUTOMOBILE SECTOR The Goods and Service Tax is a single rate tax levied on the manufacture, sale and consumption of goods as well as services at a national level. In this system the GST is implemented only on the value added at every stage of production. This will ensure there is no cascading effect of taxes (tax on tax paid) on inputs that are used in manufacturing goods. With the GST in place, the prices of goods are
expected to fall, and in the long term we can expect the dealers to pass on these benefits to the end consumer as well. 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 manufacture, deductibility of past sale discounts from value under excise, valuation of demo cars treatment of PDI charges and other dealer reimbursement advertisement charges recovered from dealers etc., and sales though 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. The GST is working towards a more viable approach when it comes to tax, which is applicable in the manufacturing process. The tax under the new regime which the manufacturer has already levied in the manufacturing process in deducted when the final product created by the manufacturer is produced in the market. Hence, the tax on products in overall reduced as the tax otherwise charges on the final product does not include the pre charged one. The same process is followed on the level of the wholesaler who sets off the tax when he purchases the good from the manufacturer and releases them in the market. The product passes from the wholesaler to the retailer the retailer after adding value to the product again sets off the tax when releasing the goods finally in
the market. In this chain of passing the goods from one to another, the tax sets off at every level, releasing a bit of pressure on all the people on the respective stages. Hence, when the final product is released the overall value of the good when taxed has a marginal variation in favor of the consumer as to re-existing rate of taxes. The double tax burden is being eliminated from this region as taxes that may have been charged and again charged on the tax that was already paid has been done away with the section, though has variations as per type of vehicle depending on the size and emissions by the same. Moreover the overall compliance burden is expected to decrease and bring lots more efficiency in operations of the indirect tax prospective the whole country will be treated as one market and will add to operational efficiencies. The GST will be positive for the automotive sector, primarily because of the efficiency and the removal of cascading that is expected with GST, example a car is manufactured in a particular state and generally 80 percent of these cars are sold to states outside the state of manufactures to dealers outside the state. So today, to straight away give you an example, the two percent central sales tax (CST) that they pay will not be there tomorrow because hopefully origin tax is not there. Even the two percent CST will be an integrated GST (IGST) which will be fully creditable by the dealer when he sells the car in the other state, and even from a procurement point of the view, if there is interstate procurement we suffer today at two percent CST which is a cost to the
manufacturer, that also will not happen because those interstate procurements will have an IGST in it which is again available as a full credit to the manufacturer if the credit rules are simple and easy. The second efficiency could be also on the input side, a bigger, more easy credit mechanism so that all the taxes on the input side, whether it is input services, whether it is capital goods, whether it is manufactured products are set off against the output liability of GST. The 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. The automobile industry for vendors to develop tools for the manufacture of parts of automobiles. The ownership of such tools is transferred to the OEMs, and the cost is also recovered from OEMs. However, the tools are physically located in the vendor's factory for manufacture of parts. As specified in model GST law the definition of capital goods covers only those goods which are used at the place of business of supply of goods. Thus, only goods which are used in the place of business of OEM seem to be eligible for GST credit in the OEM‟s hands. This could possibly result in increase in the cost of
totaling and cost for manufacture. The automotive industry has witnessed several cesses including automobile cess, NCCD, tractor cess
and infrastructure cess. In the discussions on GST, the Government has indicated its intention to subsume all Central and State cesses into GST. The existing CENVAT credit rules the input tax credit will be allowed only of those goods falling within specified chapters to the model GST law. Further the definition of inputs and input services also provides for exclusions. Therefore, it appears that even under GST, restrictions on input tax credit will continue. Generally, states provide for various incentives including investment promotion subsidies (IPS). A majority of the automobile manufacturers enjoy special benefits from the State government in the form of State investment promotion subsidies (IPS). This is given in the form of refund of VAT/CST paid. The implementation of GST, taxes move from the origin state to the consumption state. This could result in significant reduction of flow back of IPS, since GST on inter state sales is not credited to the origin state unless on inter state sales is not credited to the origin state unless there is a compensation mechanism to the states or to the OEMs with regard to the impact on the IPS due to GST.
EXISTING EXCISE DUTY RATES Vehicle Category
Excise Duty
Small cars
12.5%
Length >4m but engine capacity less than 1500cc
24%
Length >4m and engine capacity more than 1500cc
27%
SUVs/MUVs (length >4m, engine capacity >1500cc and Ground clearance >170mm)
30%
Hybrid cars
12.5%
Specified components of Hybrid vehicles
6%
Electric cars, Buses, 2W & 3W
6%
Specified components of Electric vehicles Buses Trucks Three wheelers Two wheelers
6% 12.5% 12.5% 12.5% 12.5%
EXISTING IMPORT DUTY RATES Criteria / Applicability
Import Duty in %
Used car import
125
Cars CBUs whose CIF value is more than $ 40,000
100
or Petrol Engine > 3000 CC
100
or Diesel engine > 2500 CC
100
Cars CBUs whose CIF value is less than $ 40,000
60
and Petrol Engine < 3000 CC
60
and Diesel engine < 2500 CC
60
Two-wheeler CBUs with engine capacity <800 cc
60
Two-wheeler CBUs with engine capacity >=800 cc
75
Commercial Vehicle CBUs (Trucks & Buses)
20
CKD containing engine or gearbox or transmission
30
mechanism in pre-assembled form, but not mounted on a chassis or a body assembly CKD containing engine, gearbox and transmission
10
mechanism not in a pre-assembled condition
TAX RATE FOR THE INDUSTRY 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), the 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.
SUGGESTIONS OF TAX BASE & LEVY 1. 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. 2. Tax paid on complete vehicles on movement from factory should be made available as input credit to the vehicle dealers. 3. Manufacturers could give state-wise break-up at periodically to respective state governments who may settle it through the appropriate clearing house mechanism. 4. Considering the current level of taxation, a suitable tax rate may be adopted. Tax rates should be uniform across states and there should be one authority to which payment would be made by way of one Challan. 5. Goods and services should be classified on the basis of HSN and GATTS (at both central and state levels). 6. A common base should be adopted for taxation of both Central and State GST. Under the present taxation system, interstate sales tax and local sales tax is levied on excise duty in respect of the manufactured goods resulting in cascading of taxes. 7. In case of non-sale, where the transaction value of goods or services is not determinable and when GST is charged, a simple mechanism of valuation could be adopted on the basis of cost.
8. Under GST, it is suggested that the basis of tax credit should be on „Cost to Business‟, i.e. tax, which is paid and forms cost to
business should be allowed as a tax credit, both at the Central & State level. 9. The document based credit should also be dispensed with and could be substituted by appropriate certification by an independent Chartered Accountant (or the Appointed Company Auditors). The same could be subject to appropriate audits by trained government officers and could be IT enabled. 10.
Diesel and motor spirit should be brought under GST with
input tax credit and mechanism to avail the same. VAT on diesel and motor spirit constitutes a significant element of cost for the transport industry. 11.
In the proposed GST system, it is not known whether the
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; the industry needs to understand the treatment of stock transfers for the purpose of input tax credit. 12.
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. 13.
In respect of existing exemptions having sunset clause,
appropriate transitional provisions should be introduced to ensure continuity of existing benefits. A clarification is needed on how the existing sales tax benefit schemes e.g. loan, deferral would be affected. 14.
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. 15.
Concept of „Tax Invoice‟ should be continued for availing
State GST credit. 16.
To ensure viability of EOU under severe competition, timely
refund of tax is needed. Effective refund system should be in place for smooth operations of EOUs. Presently, EOUs are eligible to get refund of CST on interstate purchase of inputs used in the production of export goods and local VAT content of the export product is allowed to be deducted against the DTA Sales and the balance, if any, is allowed as refund. 17.
Under a dual GST structure (a Central GST and a State
GST), there could be a situation where the Input Tax credits which remain assizes would be refunded to the assizes. Since the cross
utilization of credits between the Central GST and State GST is not permitted, there could be a situation of payment on the one hand and a refund situation on the other. In order to avoid this situation cross utilization of input tax credits should be allowed. 18.
Procedural changes should be notified in advance. The
industry should be given 6 months lead time before the introduction of GST. 19.
State specific incentives should be protected under GST.
GST IMPACT ON AUTOMOBILE AND SPARE PARTS INDUSTRY IN INDIA The automobile Industry is coping up with the GST regime as the government is very cautious particularly for this sector. The industry of automobiles is tremendously big which tackles the manufacturing of a very large chunk of cars and bikes every year. The population across the nation is also the major factor of this turbulence as it constantly seeks for dynamic technology and newer models. The GST subsumes almost all the taxes under its ambit like excise, VAT, sales tax, road tax, motor vehicle tax, registration duty which will further benefit the procedural ways of the automobile industry.
GST
IMPACT
ON
AUTOMOBILE
INDUSTRY
THROUGH E-COMMERCE PLATFORM The Co-founder of Boodmo, Oleksandr Danylenko, said in a statement that, E-commerce businesses especially auto components and logistics of spare parts have been adversely influenced by complex GST process. With the several factors like uplifting of composition scheme on e-commerce business along with higher 28 percent tax on both autocomponents and spare parts logistics involving complex GST process has lead to negative impact on e-commerce start-ups concerning automobiles industry. Automobile manufacturers were not able to file claims since July and nearly Rs 1,000 crores have been stuck in GST refund. Automobile exporters are in worrisome as the current GST scheme of making payments upfront and claiming of input tax credit refund is not working properly. The working capital requirement for automobiles industry has enhanced and they could consider on exports till their issues are not resolved. David Schock, CFO of Ford India said that the compensation cess has enhanced to 1-22 percent under GST, earlier it was 1-4 percent. Discussing on issues faced by automobile exporters, Society of Indian Automobile Manufacturers (SIAM) Deputy Director General Sugato Sen said that, the automobile companies which are especially dealing in export are facing problems, as the current GST
system of making payments upfront and claiming of refund tax system indirect tax regime is not working properly under GST. However, going in deep and bifurcating per product impact will be senseless as the GST rules and rates may get a shuffle due to individual exemptions and incentives provided according to the model and its growth.
GOVERNMENT
NOTIFIED
GST
TAX
ON
AUTOMOBILES Category Engine
Under 4- Under 1.2-litre Petrol
Pre-
Post-GST
+ Final
GST
Cess
31.5%
28% + 1%
29%
33.25%
28% + 3%
31%
28% + 19%
47%
28% + 25%
53%
28% + 29%
57%
metres Under 4- Under 1.5-litre Diesel metres Under 4- Above 1.2-litre Petrol or 44.7% metres
1.5-litre Diesel
Above
Above 1.2-litre Petrol or 51.6%
4-metres 1.5-litre Diesel SUVs
–
55%
Hybrids –
30.3%
28% + 25%
43%
Electric
20.5%
12% + 0%
12%
–
Vehicles (EVs) In the previous form of taxation, advance received on goods supply is not attracting Excise/VAT and composite rate while in some of the states there is VAT applicable on used cars sales. While many of the states do make available OEM Original Equipment Manufacturers (OEMs)/component manufacturer linked with a various investment linked incentive scheme. The significant components can be considered as interest-free loans and subsidies being attached with CST/VAT paid on the sales. Read Also: GST vs VAT: Simple Way to Describe the Differences It is also learned that the selling of goods and services unattached to a form of consideration is exempted from taxes under the service tax and VAT. While the dealers and importers are not eligible for the excise duty and CVD which is paid by the OEMs (Original Equipment Manufacturer). The current tax rules mentioned that VAT/CST is not applicable but excise duty is certainly on the tax part while transferring any goods from the manufacturers place and factories. As these vehicles have exemptions from auto cess/Nccd: electrically operated vehicles, three-wheeled vehicles, hydrogen vehicles based on fuel cell technology,
vehicles used solely as taxis, the ones used by physically handicapped persons, hospital ambulances.
GST IMPACT ON INDIAN AUTOMOBILE INDUSTRY Overall it is defined that the GST impact on the automobile industry is less than the previous tax scheme due to the lowered tax scenario. As the automobile industry has already gone through some tough situations like demonetization and after which emissions norms rule hit the grounds of automobiles sector. It is now done that the industry will get benefits out of GST with minimum hassle-free procedures and rate fixation across the nation. As there will be more or less similar case for the smaller cars due to the analytics of rates comparing from both the pre-GST and post-GST effects. The tax scenario has been adjusted in between 1 to 15 percent in which the small cars are being charged with 1% Cess rate with 28% GST while talking about the middle sized cars it is being levied with the 3% Cess and for the luxury cars segment, it is fixed at 25% Cess. Recommended: GST Master Class: Schedule and Time Table for Live Streaming
IRONY OF GST ON SPARE PARTS: TAX ON HIGHEST LEVEL According to the recently surfaced, spare parts bill of an automobile, it seems that the GST rates are a big issue within the industry. On a bill of 35,000, it was seen that a tax of 10000 was levied. It was a hefty charge upon the billing as tax amount is taking a toll on the pockets of the consumers. A tax rate of 28 percent on the spare parts is a heavy tax rate as most of the consumer base pay the charges on a natural act of wear and tear or upon accidental damages. Bringing such a heavy tax rate upon such incidents have made the market much more sensitive regarding the price issues. As the spare parts of vehicles both commercial and private had fallen into the bracket of highest slab rate i.e. 28 percent, it made a misery moments for the spare parts trading community. Also, the complex compliance makes it more vicious for the traders to indulge in any kind of taxing activity. The trading of spare parts is completely disrupted after the implementation of GST including the much-hyped Delhi’s Hamilton road.
Many of the traders complained that the GST made their business to the lowest rank and are expecting only 10 percent of the business of what they were earlier doing. The tax rates of 28 percent are much
higher than previously applicable 12 percent and now the customers are not willing to pay this much of taxes. The scenario of taxes can be understood, like a wholesaler in Gurgaon paying 28% tax in Delhi to acquire goods worth Rs 1,000. The GST comes out to be Rs 280, including Rs 140 as Central GST and Rs 140 as State GST. Since the supply has been made over the counter in Delhi, the buyer can claim ITC on the SGST of Rs 140 and only if he is registered under Goods and Services Tax as a trader in Delhi. The auto parts industry states this equation to be the main factor of decreased sales after the implementation of GST.
ON THE BASIS OF THIS, THE CONCLUSION COMES AT:
Luxury cars – The tax rates are combined at 42 to 45% in the GST era as compared to more than 50% above rates previously and has made a cheap tax rate scenario for the luxury cars GST rates.
Small cars – The earlier tax rates were concluded at 29% including VAT and other local levies while in the GST scenario, the same impact is created with 28% GST and 1% cess rate on it.
Hybrid cars – The biggest damage considered in the automobile sector can be attributed to the hybrid vehicle despite its promising future in the environmental sustainability. It has been levied with 28% GST rates along with the 25% extra cess on it.
Spare Parts – Spare parts are levied with 28% tax rate which is highest of the slab. Although the tax rates are recovered in initial state but the government choose to carry forward tax scenario on secondary items also. While it is totally upon the discretion of automobile manufacturers
to increase or decrease the prices of vehicles, it is to be seen in upcoming future to have stable effects on the whole industry.
GST
BECOMES
POSITIVE
FOR
COMMERCIAL
VEHICLES SALES As soon the GST got to see the day of light in India, there were some foremost benefits emerged in the economy as well as in many of the sectors. One of them is automobiles sectors, including all the segments, passengers as well as commercial vehicle segments. Also, the GST e-way bill made some possibilities for the vehicles to roam free without any border checking. In the same manner, the commercial vehicles are now way much ahead in productivity than earlier situations. The logistics companies are considering to increase the inventory of the commercial vehicle as the vehicles are now capable to take the much higher load and can transport eh cargo in much less time than previously taken.
Binaifer Jehani, director, CRISIL Research stated that “As hubs get
bigger, and more concentrated for a few industries, preference will shift to much higher-tonnage HCVs (towards 37T multi-axle vehicles and higher-tonnage tractor-trailers). Also, new product offerings by OEMs in the higher tonnage intermediate commercial vehicles (ICVs) segment will continue to gain traction along the spoke routes.”
The automobile manufacturer is also in discussion to make higher capacity vehicles to serve the industry which is ready to offer an order of commercial vehicles in anytime soon. The sales trend in the 35T, 40T, 49T tractor-trailer segment has been providing much evident proof that the logistics industry will be improving soon. With GST in the picture, good roads with better compliance procedure in the middle of the journey as well as better technology has given a positive hint to the automobile manufacturers to make more and more commercial vehicle. Tata Motors, Ashok Leyland, BharatBenz, Mahindra & Mahindra and VE Commercial vehicles are some of the vehicle providers who are standing in the first row to cater the evergrowing logistics industry.
LUXURY CARMAKER MERCEDES OBJECTION Even Mercedes Benz is not at all happy with the frequent tax rate changes done by the GST Council. Earlier in July when the GST was implemented across the nation, there was not much-known information
available on the topic but now as the time passes, it has unveiled that the actual implementation has taken a toll on various business. The impact has certainly reached to the luxury carmaker Mercedes and has gone up to say that frequent tax rate changes may take away future projections under anonymity. The luxury cars put down into sin tax category with an increased charge of Cess overall taking the tax incident up to 50 percent on various models. The sale of luxury automobiles is already under lower stats and higher tax applicability will take away its chance to grow further in the country. The carmaker also made some unexpected comments and said that there is higher risk involved in planning as the government tax rate tweaking is more than enough.
AUTO SECTOR WANTS THE GOVERNMENT TO ELIMINATE CESS ON CARS UNDER GST The sharing of GDP in the automobile sector of the country is 7 percent, so it is important to discuss this issue in the budget. With the fifth position in four-wheeler sales and first position in the sales of twowheelers, India is the largest automobile market in the world.
OCIETY OF INDIAN AUTOMOBILE MANUFACTURER (SIAM) Association had demanded earlier this year that all passenger vehicles should be categorized into two separate slab rates
under GST. Currently, 28 percent tax and an additional 1 percent cess are being levied on small petrol cars whereas 28 percent tax and an additional 3 percent cess is being imposed on small diesel cars. All other cars including Hybrid ones attract a 28 percent GST and an additional 15 percent cess. SIAM is demanding that the government should remove the cess completely from all these cars. However, this is not expected to happen as the government cannot actually remove cess from all categories of cars.
CHAPTER:-2 REVIEW OF LITERATURE The structure and loopholes of the Goods and Services Tax in India was examined in the first discussion paper of the Empowered Committee of Finance Ministers (2009). Poddar & Ahmad (2009) discuss different aspects of GST implementation, relating to the principles, issues, and procedures. The paper cited the introduction of GST to be the most significant tax reform in India, increasing tax compliance and transparency. Vasanthagopal (2011) focussed on how GST would be a significant improvement over the prevalent complex indirect tax system in the context of different sectors in the economy. FICCI (April 2013) emphasized GST to be a necessary condition for achieving double digit growth in India, provided all the stakeholders are prepared for the change. Mawuli (2014) suggested GST to be less than 10% in low income countries to mitigate the adverse effect of GST. Kumar (2014) highlighted GST’s role in eliminating economic
distortions by enabling the developing a unified national market with a common tax rate. Pinki and Verma (2014) illustrated that GST would result in a number of benefits for all the stakeholders involved, consumers, government at the central and state level. The study also highlighted robust IT infrastructure to be imperative for GST to be implemented successfully. Sehrawat and Dhanda (2015) concluded GST
to result in increased output, employment and economic growth, owing to greater transparency. Caruso et al. (2016) suggested GST to aid economic development of India and also lead to an increase in the GDP by more than 2%. Khurana & Sharma (2016) point to the role of set offs available, as an advantage to the producers and consumers in the Indian economy. Rizwana (2016) found GST to have a positive impact on the employment and economic stability, thus improving the growth prospects of India. Kumar (2016) compares GST and the present system of taxation and mentions tax credit set off to be an important distinguishing factor. Lourdunathan & Xavier (2017) discuss the challenges in implementation of GST and identify prospects of GST that would benefit the producers and consumers. The prior literature discusses GST as a concept and illustrates its benefits theoretically. Empirically, the focus on the impact of GST on economic growth, employment exists. The present study attempts to fill this research gap by empirically examining the impact of GST on the two chosen sectors of the economy – Real Estate and Automobiles sector, with significant contribution to the economic growth. The study also provides a comprehensive view on the GST implementation in this context.
AUTOMOBILE SECTOR India’s automobile exports contracted 9.7% during the first quarter
of this fiscal year with a growth of approximately 1.91% over the
previous fiscal year, with commercial vehicle segment leading the export growth. The automobile industry seems to be thrilled with the notion of a simplified tax regime, which can be achieved through the introduction of GST. The current tax structure on automobiles is riddled with complexities. Currently, automobile sales are subject to six different types of tax at various rates, which includes Excise Duty, Infrastructure Cess, Octroi, VAT, Motor Vehicle Tax/Road Tax and Tax Collected at Source (TCS). At present, the excise duties on vehicles are divided into four slabs, in which the smallest tax rate is applicable to small cars. The current indirect tax provision comprises of: Small cars (less than 1200 cc) attract 27.6% tax (Excise Duty 12.50% + sees 1.1 % + VAT 14%)
Medium cars (1200 cc - 1500 cc) attract 39.1% tax
(Excise Duty 24% + sees 1.1 % + VAT 14%).
Luxury cars (beyond
1500 cc) attract 42.1% tax (Excise 27% + sees 1.1 % + VAT 14%).
SUVs (beyond 1500 cc) attract 45.1% tax (Excise Duty 30% + sees 1.1 % + VAT 14%). Owing to different types of indirect taxes collected by
the Centre and State separately, taxes paid on some of the inputs were not set-off against the final tax. With the GST implementation, the automobile industry will be benefited in the following ways: Taxes levied by the Central government, such as Excise Duty and by state governments as Sales Tax would be subsumed into one tax uniform tax.
If the proposed tax rate of 18-20% are approved, the prices of vehicle are expected to decrease by almost 8-18%, which will then lead to
increase in demand for automobiles in the domestic market but will also make India-made vehicles more cost-competitive in export markets. All input taxes paid will be offset against the output liability of GST. Since
CST will be subsumed in GST, manufacturers will no longer be required to have warehouses at multiple
locations across states. The overall
compliance burden is expected to decrease and bring lots more efficiency in operations.
Due to complexities in the current tax
structure Foreign investors were reluctant to invest in India, primarily
because of the country’s regulatory and bureaucratic complexities. A
successful enactment of the new indirect tax regime would have a transformative effect on FDI in India.
Since GST will also lessen
overall production cost and hassles, thereby encouraging domestic as well as international car manufacturers to expand their businesses and
make Indian products more qualitative and competitive across the world. While the automobile industry is betting big on the new indirect tax regime, it still has some apprehensions of the same: How will the new rates be decided? Will there be a uniform rate for all sizes of cars? Will they all fall under the same 18-20% tax rate bracket?
The
Automobile industry has seen significant disputes under central excise valuation. The 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.
The job work process is the backbone for
automobile industry operations. The GST law treats 'job work' as a
service and seeks to maintain existing excise procedures. However, some more clarity is needed in the conceptual framework for job work as it will pose as a challenge. Lack of clarity on subsuming of various cases applicable in the automobile industry.
In the proposed GST
system, it is not known whether the stock transfer would remain exempt from tax (at present, sales tax is not levied on Stock Transfer) or would
be made taxable in the importing state; the industry needs to understand the treatment of stock transfers for input tax credit. Dealer incentive Schemes and MOU with the states. Overall economic activity is
expected to increase and we could expect a better GDP growth that should push demand for vehicle across categories. Impact of Tax cascading will also go away that will reduce overall cost of vehicle manufacturing as all taxes on input paid will be offset with the output liability of GST. The industry should be given sufficient lead time for adaptation before the introduction of GST.
CHAPTER:-3 RESEARCH METHODOLOGY
The Indian automobile market can be divided into several segments viz., two-wheelers (motorcycles, geared and ungeared scooters and mopeds), three wheelers, commercial vehicles (light, medium and heavy), passenger cars, utility vehicles (UVs) and tractors.
Demand is linked to economic growth and rise in income levels. Further, it is inversely related to the interest rates and fuel prices as 85% of the total vehicles are bought on credit. Per capita penetration at around eighteen cars per thousand people is among the lowest in the world (including other developing economies like Pakistan in segments like cars).
While the industry is highly capital intensive in nature in case of four-wheelers, capital intensity is a lot less for two-wheelers. Though three-wheelers and tractors have low barriers to entry in terms of technology, four wheelers are technology intensive. Costs involved in branding, distribution network and spare parts availability increase entry barriers. With the Indian market moving towards complying with global standards, capital expenditure will rise to take into account future safety regulations.
As compared to their global counterparts, both the two-wheeler as well as four wheeler segments are relatively lesser fragmented. However, things have changed, especially on the passenger cars
front as many foreign majors have entered the Indian market. As a result, pricing power is likely to diminish going forward.
Automobile majors increase profitability by selling more units. As number of units sold increases, average cost of selling an incremental unit comes down. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.
HOW TO RESEARCH THE AUTOMOBILE SECTOR (KEY POINTS)
Supply
The Indian automobile market has some amount of excess capacity. Demand
Largely cyclical in nature and dependent upon economic growth and per capita income. Seasonality is also a vital factor.
Barriers to entry
High capital costs, technology, distribution network, and availability of auto components.
Bargaining power of suppliers
Low, due to stiff competition. Bargaining power of customers
Very high, due to availability of options. Competition
High. Expected to increase even further. FINANCIAL YEAR '16
A total of 18.9 m two-wheelers was sold in FY16, a growth of a tepid 2% over the previous year. The slow growth was on account of the tepid recovery in the Indian economy. Motorcycles accounted for 65% of the total two wheelers sold and were flat YoY. The scooters (geared & ungeared) segment was the only hope the two wheeler industry logging in a growth rate of 8% YoY. In the domestic market, volumes in the 3-wheeler segment were up 1% YoY. However, given the currency issues in the major emerging economies the exports declined by 15% YoY.
After good growth in last year, FY16 also proved to be strong year for the medium and heavy commercial vehicles (M/HCVs) segment as volumes increased 28% led by reversal of mining bans, resumption of some stalled infrastructure projects, improvement in freight rates and overall operations of fleet operators. LCVs, after facing a heat in FY15 continued the tepid trend and was flat for the year. As a result, volumes for the overall CV industry grew by 12% YoY.
Volumes of passenger vehicles (PV) declined by 1% YoY. Within this, passenger cars grew by 6% YoY, however with some exciting products launched in FY16, the Utility vehicles (UVs) grew by 11%
YoY. Maruti Suzuki remained the market leader in the passenger vehicles space. In addition to the market leader in the passenger car segment, company introduced two landmark products in the Utility Vehicles and thus has started gaining market share in that segment as well.
Most of the companies reported an improvement in operating margins largely on account of various cost rationalization measures undertaken and benign commodity prices.
PROSPECTS
With the Modi government in power, there are expectations of increased focus on reforms and ramp up in infrastructure. Thus, government spending on infrastructure in roads and airports and higher GDP growth in the future will benefit the auto sector in general. We expect a slew of launches both in passenger cars and utility vehicles (UVs) given that the competition has intensified.
The multi-year low interest rates and subdued petrol prices augurs well for the Indian auto sector. Historically, the demand for the PVs has been negatively correlated to the interest rates. Further, the 7th pay commission payout will also play out well for the auto Industry in FY17.
Historically, the Indian Passenger car market has been skewed towards small passenger cars. However, there is a structural change taking place in the industry with demand for UVs taking over the
passenger car. This shift is paving a way towards new avenues of the growth and will result in a more profitable growth for the sector.
In the 2-wheeler segment, motorcycles are expected to witness a flurry of new model launches. Though the market size is expected to grow by 10% to 12%, competitive pressure could keep prices and margins under control. TVS, Honda and Hero Motocorp will continue to benefit from higher demand for ungeared scooters in the urban and rural markets. In the last four years, scooters have grown at a faster clip than motorcycles and this trend is expected to continue going forward. The 3 wheeler industry, where Bajaj Auto is the market leader, is also poised for growth on the back of new permits and increase in exports.
While good monsoon is a positive for the tractor sector, assuming that non-farm incomes climb up, volumes should hold up well in the longer run despite a year or two of poor monsoons. The longer-term picture is healthy in light of poor mechanization levels in the country’s farm sector and the thrust of the government on
improving rural infrastructure.
Demand for HCVs is expected to grow by 7% to 8% over the long term. The privatization of select state transport undertakings bodes well for the bus segment.
CHAPTER-4 BACKGROUND OF THE STUDY
India is on the verge of a giant leap from the current indirect tax regime to the new indirect tax regime, namely Goods and Services Tax (‘GST’), scheduled to come into effect from 1 st July, 2017. GST is a new
chapter in Indian economy, possibly the biggest or one of the biggest and most significant tax reforms India has witnessed ever since the independence. The entire structure of taxation on goods as well as services is being realigned into a single destination based value added tax as against the current origin based set up of multiple taxes with limited credit for the tax suffered on earlier transactions in the chain. Therefore, GST is going to impact everyone in the economy - each sector across the business world - manufacturing, trading, construction, exports, banking & finance, insurance, professionals, all sorts of services etc., the governments at all levels, even the judiciary and hence ultimately the Common Man who pays for the goods and services. The impact would depend on effect of changes on one’s business as also on one’s ability to analyse the im pact of changes not only on own business
but also that in procurement and distribution chain to optimize the benefit under the new regime. The changes may have positive or negative implications for a given business entity or segment of an industry or given industry as a whole. Automobile industry is one of the largest in the world, growing and dynamic sectors in the Indian
economy, having complex operations from tax angle and subjected to fairly high rates of taxation under the current provisions and would obviously have wide implications, both positive and negative, on change over to GST. The annual production of industry was 23.96 million vehicles in FY (fiscal year) 2015 – 16, following a growth of 2.57 per cent over the last year. The automobile industry accounts for 7.1 per cent of the country's gross domestic product (GDP). The Two Wheelers segment, with 81 per cent market share, is the leader of the Indian Automobile market, owing to a growing middle class and a young population. Moreover, the growing interest of companies in exploring the rural markets further aided the growth of the sector. The overall Passenger Vehicle (PV) segment has 13 per cent market share. India is also a prominent auto exporter and has strong export growth expectations for the near future. In FY 2014 – 15, automobile exports grew by 15 per cent over the last year. In addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the Two Wheeler (2W) and Four Wheeler (4W) market in the world by 2020. The automobile industry broadly comprises of the following: Automobile Manufacturers (OEMs), who manufacture Motor Vehicles – broadly divided into four segments viz. passenger cars including utility vehicles, commercial vehicles – for goods & passenger application, two wheelers and three wheelers, each
having different business processes, tax structure and therefore issues related to taxation.
Auto Ancillaries supplying components to the OEMs
Dealers of OEMs GST would impact each of the above constituents of the auto
industry. This article intends to highlight the key GST impact areas mainly from the OEM perspective. As stated, OEM constituent has segments and each segment – notably passenger cars, has further subsegments, each having different features and hence different tax implications. However, in this article we have dealt with implications from the point of view of OEM as single sector and wherever the implication is significant and related to one of the segments / subsegments, made reference to the same. Moreover, since we are trying to cover all the implications or impact areas for the sector in this single article, number of them have been summarized though quite a few of these issues can be subject matter of detailed discussion. Also, we have concentrated mainly on Motor Vehicles and not so much on spare parts and service activities of OEMs. 1. Quantum of tax burden on the end customer:
The impact areas are as follows: a)
Currently, the Motor Vehicles are subject to multiple indirect taxes
viz. Central Excise Duty, Automobile Cess, Infrastructure Cess,
National Calamity Contingent Duty (NCCD) as applicable depending on tariff classification, Central Sales Tax (CST) on inter-state sales, and State level taxes notably Value Added Tax (VAT) and other taxes like Entry Tax, Local Body Tax, Octroi etc. varying from State to State, which all get passed on to the end customer. There is tax cascading also in as much as CST & VAT are payable on the value inclusive of Central Excise duty & other central levies and VAT is payable on CST. CST impact of 2% & cascading effect thereon is particularly relevant for cars & two wheelers which are sold directly from OEM factory to dealers, most of which are inter-state sales. At present, depending upon the type of vehicle, the indirect tax burden in the hands of ultimate customer could generally vary somewhere between 28% and 56% of the price. Under GST, all these duties, taxes and cesses would be subsumed and cascading effect avoided. The expected combined rate of tax under GST for Motor Vehicles is 28% or 28% plus cess at the rate ranging from 1% to 15% depending on type of vehicle except the electric cars which will attract 12% tax. b)
The outbound supply chain is restricted between manufacturer and
dealer and there are no other intermediaries, except for sales of spare parts, which means limited amount of margins in the distribution chain as compared to number of other trades with longer chain in distribution. Under GST, price to end customer would be subjected to full tax incidence as against Central Excise Duty currently applicable only on
manufacturer’s price and not the trading margins. Though moderately,
this would broaden base for tax levy in GST and hence would have adverse cost implication for end customer. c)
The OEM factories typically supplying given model of vehicle to
dealers spread across the country, either directly or through depots, involves good amount of expenditure on outbound logistics. Under the current regime, no Central Excise Duty and CST are liable on transportation cost for vehicles directly sold from OEM factory to dealers whereas under GST such transportation cost would suffer tax at the same rate as applicable for the Motor Vehicle. This would have adverse cost implication for cars and two wheelers where the distribution model of direct sales to dealers is a common practice. 14.
A chart showing expected combined rate of tax under GST
including the Cess where applicable vis - a - vis rate of tax burden currently on end customer for different types of Motor Vehicles is appended. As stated in (b) and (c) above, in GST the rate would apply on a wider base value. If we see the rates under GST, the tax rate on high end passenger cars viz. large cars and sports utility / utility vehicles with specified higher features (both attract very high rate in the current regime), would significantly reduce. However, these high end cars are sold in relatively much less numbers. In case of small cars which account for bulk of domestic car sales as also for the commercial
vehicles and two/ three wheelers, the change is marginal when we also consider the increase in base value for tax computation. Post GST Change In percentage of tax applicable on various Motor Vehicles
Post GST Likely Sr. No.
HSN Type of Vehicle
Code
Pre GST duties & taxes
Post
Difference
GST
in tax
(CGST Central
+
Excise
VAT &
SGST
incl.
CST*
incl.
Cesses (Approx.)
Total
cesses)
%
%
%
%
%
14.63
18.07
32.70
29
-3.70
Passenger Cars 1
including UVs:
8703
Small Car (a)
Petrol
length < 4000mm engine cc < 1200
Small Car (b)
Diesel
16.13
18.31
34.44
31
-3.44
29.13
20.37
49.50
43
-6.50
32.13
20.83
52.96
43
-9.96
35.13
21.30
56.43
43
-13.43
length < 4000mm engine cc < 1500
Mid - segment (c)
car
length > 4000mm
engine cc < 1500
(d)
Large Car
length > 4000mm
engine cc > 1500
Sports Utility Vehicle/ Utility (e)
vehicle
length > 4000mm
engine cc > 1500
ground clearanc > 170 mm
Hybrid Car Mid segment &
e
(f)
large
13.63
17.91
31.54
43
11.46
7.13
8.70
15.83
12
-3.83
12.63
15.20
27.83
28
0.17
engine cc < 1500 & engine cc > 1500
(g)
Electric Car ***
Fully Built Commercial 2
Vehicles
(Goods truck, bus > 13 persons )
(a)
Diesel
8704 & 8702
Special Purpose (b)
vehicles
8705
12.63
15.20
27.83
28
0.17
8706
13.13
15.27
28.40
28
-0.40
14.13
15.40
29.53
28
-1.53
Chassis - diesel 3
- for Goods truck
-for bus > 13 persons
Two Wheelers -
4
Petrol
8711
Motor cycles engine capacity > 350 cc
13.63
17.91
31.54
31
-0.54
13.63
17.91
31.54
28
-3.54
12.63
17.75
30.38
28
-2.38
Other Motor cycles, scooters, mopeds
Three wheelers ( other than 5
20.
electric)
8703 & 8704
Varies state to state & depends on distribution model. Cars and 2/3
wheelers are generally sold from OEM factory to dealers directly and then by the dealers locally. Sales from OEM factory to dealers are mostly inter-state. Hence, effect of CST @2% & VAT @13.5% both considered, including cascading effect. Commercial vehicles generally sold from depots. Effect of VAT @13.5% only considered on value inclusive of Excise Duty. Some other local taxes may also apply. Hence, overall % indicated is approximate %. **
Dealer margin is not subjected to Central Excise Duty and CST.
Similarly, in case of cars and 2/3 wheelers generally sold directly from
OEM factory to dealer, the transportation charges are not subjected to Central Excise Duty. These two elements would be subjected to GST which factor needs to be considered while making comparison. *** Some exemptions under VAT in some of the states. VAT rate considered in working at 6%. Actual impact will depend on VAT rate in respective State. e)
The concessional rate for Hybrid cars is withdrawn in GST and
they would be subjected to tax @43%, a major set- back to the upcoming segment. As for electric cars, the impact would depend on different VAT rates currently applicable in respective States. f)Post sale services like insurance, AMC, servicing, repairs etc. may cost more to the customers with increase in rate of tax on services. As regards repairs, there is some ambiguity as to their treatment as supply of goods or as supply of services whether to be treated as composite supply with significant 10% difference in rates applicable on components and service. g)
State Level Vehicle Tax / Road Tax is not subsumed in GST and it
will continue to be a cost to the customer. If taxes on acquisition of vehicle reduce, some States may be tempted to hike the Vehicle Tax. The Automobile Industry had strongly recommended that the Vehicle Tax be subsumed in GST which is not acceded to by the Government. (SIAM recommendations on GST).
h)
Car / vehicle leasing is expected to cost more to the customer with
lease taxed at the same rate of central (& State) tax as applicable for sale of car / vehicle and further there being no transitional provision for credit of taxes already paid in respect of cars/ vehicles under on – going leases as also with no abatement for amount representing as interest in transactions for financial leasing including hire purchase, currently available under service tax.
IMPACT ON COST OF PRODUCTION AND DISTRIBUTION: Under the present tax structure, the OEMs are eligible for input tax credit of Central Excise Duty and VAT on their procurement of inputs and capital goods as well as for input tax credit of service tax on most of the services they avail. Their transactions are with registered entities and credit chain is well established to capture and avail of the input tax credits eligible. However, in the current structure there are inherent limitations on credit eligibility whereas under GST, input tax credit would be fully allowed barring a few exceptions, thereby cost incidence of tax paid at earlier stage in the supply chain would be totally avoided. This would lead to tax neutrality in both inward and outward transactions and business decisions can be made based purely on operating efficiency rather than on tax considerations. All this in effect would reduce the cost of procurement & production as well as cost of distribution which would be the biggest benefit to industry in GST. The
main potential areas for saving / additional benefit under GST are as follows: a)
Saving of 2% CST on inter- state procurement.
b) Saving in VAT surrender where the sales to customers in other States are routed through depots - commercial vehicles as well as on transfers of semi-finished goods to other factories – 4% or even more of corresponding purchases within State. c)
Saving in octroi/ LBT/ Entry Taxes without credit on procurement.
d)Input tax credit on outward transportation – net benefit where the vehicles are sold through depot – commercial vehicles. e)
Vendor price reductions for corresponding benefits in supply chain
as also towards excise duty on any transactions in the supply chain with entities not registered. Tax cascading effects in supply chain which can involve 3/4 levels will be avoided and which can also be built in negotiations. f)
Wider input tax credit availability e.g. warranty parts, services
related to trading activities, items like furniture, office equipment etc. currently out of credit chain. g)Rationalization of procurement decisions due to flexibility arising out of tax neutrality e.g. decisions on job work, location of vendor no bar, level of assembly – all decisions can be made based on operating efficiency alone. h)
Rationalization of vendor base.
i) Tax neutrality will support procurement of higher level assemblies and consequently more outsourcing if economical. j)Realignment of production processes even if the units are in two different States e.g. centralized production of certain components and its supply to other units if operationally more efficient. k)
Eventually, vendors will also rationalize their processes and
locations to optimize costs. l)Realignment of distribution chain e.g. with no specific tax benefit to anyone in effecting sales through depots, depot operations can be restricted only based on business needs e.g. proximity to customer and possibilities of more direct sales from factory can be explored. The concepts like regional depots at central places to cater to dealers in more than one State due to tax neutrality and have the benefit of existence of depot at lower cost, bulk transportation by railway or even waterways up to certain central place for further distribution there from without tax implication etc. can be put through. m)
Saving in current cost of non-abatement of Excise Duty on post-
sale incentives, However, the requirement for working capital on inventory at all stages – in factory, at depots, in transit, at dealerships will go up with blocking of more funds in taxes in the absence of transactions at concessional rate like C Form, F Form transactions currently possible.
While the scope for input tax credit is widened, compliance effort for the same would considerably go up with credit matching concept and new issues on reconciliation will arise.
IMPACT ON THE STATE INCENTIVE SUBSIDIES ON CURRENT INVESTMENTS / AREA BASED CENTRAL EXCISE EXEMPTION IN UTTARAKHAND Most of large OEMs have made huge investments in particular States providing special incentives and are currently availing various package scheme incentives from the respective State governments. These schemes provide for payment of incentive based on the output State VAT/CST paid on the sales made from that State net of input tax credit availed in the particular State. In some cases the refund is provided for the State taxes paid on the gross basis. Further in some States there is upfront exemption from payment of sales tax. With the advent of GST Regime the entire taxation concept for goods would be moving from origin based taxation to destination based consumption tax. Hence an OEM which is having a plant in a State and is making interstate sale from that plant, under GST Regime it would pay IGST which would accrue to the receiving State. Under the current regime the OEM would have paid CST which was collected by the originating State. Therefore, in GST Regime the concerned State
Government would not be willing to give the subsidy in respect of the IGST paid on the interstate sale and also in respect of the CGST component collected in respect of the local sales. The OEMs have already started representing this issue with the respective State Governments with suggestions as would protect the quantum of incentives. This could be a major impact area for the companies who have made investment on the assumption that they would get a particular level of incentive/subsidy and a matter of concern till the issue is satisfactorily resolved with concerned State Government. A number of OEMs were attracted to Uttarakhand, substantially keeping in mind the exemption from Central Excise Duty under the area based central excise exemption scheme. Since the concept of exemption is not in tune with the concept of free credit flow in GST, the scheme of benefit to units in the area would need total revision. There is no clarity in public domain on how the Central Government proposes to go about. While some of the OEMs have completed the period of exemption benefit, few companies are still within the benefit period and decision by the Central Government would be crucial for them. Besides, for these OEMs the decisions like product pricing under GST, vendor pricing etc. would be crucial but very complex.
INPUT TAX CREDIT ON GST TRANSITION STOCK: This may not normally be a major issue for OEMs at their factories since purchases are from registered entities and credits will be carried forward on the basis of returns. However, during transition, ensuring that credit is timely availed for all receipts will be challenge due to large volumes and diverse locations, though well set processes exist. The depots, predominantly in commercial vehicles, will have Excise Invoices as they receive vehicles from OEM factories. Problem would be restricted to any vehicles transferred from other depots without Excise Invoice but the depot registrations and provision introduced for Credit Transfer Document will help in most such cases. As far as dealers are concerned, in Cars and two wheelers, where there are direct sales to dealers, the dealers will have Excise invoices. As for sales from depots, ,commonly done in commercial vehicles, depot registrations have been taken by OEMs so that the dealers have excise invoices and problem is restricted to old stock prior to such arrangement. The provision introduced for Credit Transfer Document will help here also in most cases. The ‘eligible duties’ on which credit is available to traders on
transition do not include Infra-structure cess applicable on Cars. To that extent, credit will not be available to the dealers on the transition stock and the same would be a cost.
FINANCE,
ACCOUNTING,
COMPLIANCE,
TAX
COSTING,
LEGAL
ADMINISTRATION,
IT,
TRAINING ETC. The areas of implication which could be favourable or adverse as well as the areas which would need lot of effort are: (a) Overall reduction in cost but working capital requirement likely to go
up. Continuation of quantum of Government incentives can be a concern for some OEMs. (b)
Current VAT accumulation problem at manufacturing locations
(due to transfers to depots/ CST sales at 2%) will not be there but the problem may shift to depots and need close monitoring. (c) Easier compliance in some matters e.g. no Section4A / Rule 10A valuation, no GAQ computation on stock transfers, lesser classification issues, no Forms collection, no issue of pre-determined sale etc. (d)
Big challenge of setting up new internal processes, accounting and
IT system to comply with GST provisions in particular with new concepts like tax on advances received (a common practice in automobiles), credit matching, taxability of internal services, new valuation provisions, extension of related person concept & coverage of employees therein, ITC at depots, concept of composite supply and in particular its implications in services etc., some of which are very difficult to implement in OEMs who have complex operations and
organization. Carried forward issues under old laws like assessments, litigations etc. will simultaneously continue. (e)
Study of cost implication at Vendor end and re-negotiate the
prices. Similarly, study of the cost implications at dealer end and dealer incentive schemes and re- work compensation and incentive schemes. Dealer incentives will have to be passed on with invoice reference. (f)
Re- working of product and services pricing.
(g) Extensive training – internal as well as external to Vendors and Dealers as they become partners in credit chain and any tax optimization efforts. (h)
Absence of LTU & Centralized Service Tax registration under
GST – major tax administration concern for several companies operating under the same. Internal monitoring processes will change. (i)Tax function at States / depots / branches will have to be strengthened due to State level compliances and changes will be required in internal monitoring processes. (j)
Compliance of anti-profiteering provisions.
(k) Raising of self- invoicing on all purchases from unregistered persons. Plain reading and absence of clarification results in all imports also requiring self- invoicing - compliance efforts.
GST
ON
PETROLEUM
PRODUCTS
– A
LOST
OPPORTUNITY: The diesel, petrol and CNG are and can reasonably be expected to continue for next few years at least to be the main fuel for Motor Vehicles on Indian roads. They constitute largest part of the cost of running a Motor Vehicle. As such, any policies concerning them have bearing on automobile industry. Diesel and petrol are heavily taxed by both the Centre and the States. Their inclusion in GST and the consequent benefits to Petroleum companies could rationalize their prices and also made extension of full GST principles to transport sector possible. This could possibly have helped Automobile sector in terms of demand for Motor Vehicles. However, with the decision to defer GST implementation for petroleum products for the time being, the automobile industry has lost the opportunity till the policy decision is made to include petroleum products under GST.
LONG TERM IMPACT ON ITS OWN PRODUCTS? The tax neutrality because of GST would remove one barrier viz. tax cost in free movement of goods within country. Government is seriously pursuing the initiatives to reduce the road transportation time through improvement of road infrastructure as well as through various measures to reduce time involved in any procedural issues in transit. One such initiative being implemented along with GST is E way bill.
Over long term, all these initiatives, if not GST alone, can change distribution practices in the country, and consequently the goods transportation practices e.g. shift towards heavier vehicles for long distance transportation, which may have implication on demands across segments of goods vehicles.
CHAPTER:-5 ANALYSIS
The 14-year-long journey of Goods and Service tax (GST) finally culminated on July 1, 2017 with the implementation of the biggest tax reform of India in 70 years of independence. While the government of India under the leadership of Prime Minister Narendra Modi hailed the moment of ‘Good and Simple Taxation System’ for the benefit of
common people, small traders and industry as a whole; the opposition parties have slammed the establishment for forcing a half-baked GST regime over the taxpayers. The whole issue about the impact of GST on the auto industry hovers around the compliance of the new taxation system by the sector as a whole. The outlined benefits of GST on auto industry are primarily simplifying logistics and constraining the operational and manufacturing costs, the compliance is something industry is vary about. In order to reap the benefits of GST you need to take a close look to ensure the compliance of GST by both the parties you are directly linked to. Whether you are a business owner or a buyer of a car, scooter or moped, you need to be equipped to take on the GST ferry. You can use the support of ASP and GST suvidha providers authorised by the government to understand the details of compliance and related concerns.
What started as a Single Nation Single Taxation drive has largely unified 17 different taxes including various excise duties, octroi, service tax, VAT, and many more. However a nation of more than a billion people has ideologue ready to delineate GST as another 17th tax. The myth is widespread like a cacophony before the elephant starts to walk. To brace with the impact of GST Indian Automobile Industry offered pre GST discounts on cars, scooters and bikes. The discounts poured in throughout the June as the Auto majors like Maruti Suzuki, Toyota, Hyundai, Honda and mostly all players announced big rate cuts in a race to trim their inventory ahead of GST . Amidst all the turmoil and apprehensions, July’17 went loudly
ahead than the previous sluggish months and ended with a bang for the entire industry with Maruti Suzuki, Honda Cars and Ford India grabbing the podium. While The Maruti Suzuki recorded a staggering domestic growth of 22.4% in July ’17 as against July’16 Honda Cars too came out with flying colors with an astounding rise of 21.74%, as compared to July 2016. The initial GST ambiguities seem to be settling down and the festivity ahead will only add ice on the cake. To understand the impact of GST on the industry as a whole, you need to understand its effect on various business operations including production, procurement, pricing and sales strategy.
SIMPLIFICATION OF LOGISTICS WITH INPUT TAX CREDIT
GST has been introduced to subsume the current indirect tax regime which used to attract several duties and taxes on the sale of vehicles and spares and accessories. The previous taxation regime included:
Central Excise Duty
Additional Excise Duty
Infrastructure Cess
CVD and Additional Import Duty
VAT on intra State sales
CST on Interstate sales Currently, all these resulted in cascading effect and increased the
product price. However, now it is expected that product cost will be substantially reduced due to seamless input tax credit (ITC) across the supply chain – from manufacturer , to supplier, to agent, to final buyer all can claim input credit for tax paid on purchases. Now the businesses would be able to claim ITC on various elements across the supply chain like lease rentals, IT services and freight charges. The bottlenecks related to logistics and transportation of units from one state to another state would also be wiped off. The reduced cost will in effect reduce the price and raise the demand and growth in the sector. The consumer in India is price savvy and
companies never fail to use the event to bring sale and discounts. Nevertheless, post-GST rollout, Maruti Suzuki, Tata Motors, Toyota, Nissan and Renault India have also announced the discounts to pass GST benefit to the end buyer. REDUCTION IN OPERATING COST
With
elimination
of
CST,
companies
need
not
maintain
warehouses and C&F agents at multiple state points. The warehousing infrastructure could be clubbed and lower the operating costs in the supply chain. Further with the inclusion of business overheads such as advertising, business promotion under Input tax credit, the operation cost would be further reduced. IMPACT ON WORKING CAPITAL
This would be a huge concern for the dealers as the supply is taxable in GST. On the date of vehicle transfer, GST would be paid and it would lock the capital. Now the dealer would be required to pay GST on the same day as he receives the advance and it will hurt their outflow. Another cash lock would be when the auto manufacturers would offer free services/warranties as sales’ benefit to their customers (at the time
of sale of vehicles). They would pre-pay GST on the issue date of the coupon while customers would be using the service on a later date.
IMPACT ON AUTO VALUATION AFTER GST
The base GST rate has been set at 28% besides a cess (1% to 15%) on vehicles of different categories and sizes. Together both will impact the end prices. LOW IMPACT ON TWO WHEELERS
The impact of GST is marginal on two-wheelers sector as the levy is 28 % on engines below 350cc and 31% on engine above 350 cc is 31%. Earlier the segment was charged with 30.2 %. Largely the impact on prices of 81% of market would be broadly unaffected. HIGH IMPACT ON COMMERCIAL VEHICLES
The commercial vehicle segment comprises commercial vehicles and three-wheelers. Earlier the segment was paying 12.5 % Excise Duty + 1 % NCCD + 12.5 % VAT and 2 % CST which totalled to overall 30.2 % of tax. Herein three-wheelers were excluded of 1% of NCCD. After GST, the overall impact on the segment is a slight dip of 2.2 % as the levy is 28%. So, the impact in valuation is again negligible. Similarly, there would be no change in the prices of tractors. The maximum effect would be visible on a new category being introduced for minibuses ferrying up to 13 passengers. Besides the base rate, the passenger vehicle would invite a 15 % cess on them shooting up the total GST to 43%, which is a major cause of concern.
LOW IMPACT ON PASSENGER VEHICLES Small cars (both petrol and diesel variants; engine below 1200 cc)
The economic car section would attract the base rate of 28% GST along with a cess of 1% and 3% which is smaller than current 31.4% to 33.5%. In effect, the price of this segment would be neutral or reduced marginally. Bigger sedans and SUVs (1,500cc or more engine size, Over 4,000 mm length and Over 170mm ground clearance). In this segment, the buyer will enjoy the price cut. The current tax rate was 46.6% to 55.3% which was much higher than the new GST rate of 28 % (+15 % cess). REEN VEHICLES UNDER THE PURVIEW OF GST
A 15% cess above the base GST rate of 28% on green vehicles is questionable as it is far above the existing 30.3% rate. While the officials have claimed that smaller hybrid vehicles are ruled out from additional cess of 15%. DEMO CARS HEAVILY TAXED
GST demands a high tax rate on the demo cars. Currently, these vehicles were taxed at 0.5% while they are sold in the used car market after a year or so. With GST, tax rates of 28% and 43% of the sale value would be levied.
CHAPTER:-6 CONCLUSIONS, REFERENCES
One hundred and twenty second amendment, or popularly known as the GST is a landmark reform, changing the Indian economy for good. There are lots of speculations and apprehensions relating to GST, how will tax credit set off availed, who will levy, which tax and also how the actual impact of GST will differ on different sectors. This study aims to study the impact of GST specifically for the real estate and automobile sector in India. In case of real estate, effect of GST on real estate in terms of outflow for developer & consumer will depend on the final rate of GST. GST would provide an audit trail for better control and monitoring of the sector. And in the case of Automobiles sector, it will benefit from the increase in the economic growth translating into higher consumer spending for vehicle across categories. Impact of Tax cascading will also go away that will reduce overall cost of vehicle manufacturing as all taxes on input paid will be offset with the output liability of GST. However, the industry would be able to translate all these benefits, given sufficient lead time for adaptation before the introduction of GST. The findings of the study are pertinent to industry practitioners, academicians and policy makers. The study provides a comprehensive view on the impact of GST on the real estate and automobile sector,
making it easier for adaptation. For the academicians, it is of interest a change as significant as GST which has economy wide ramifications are understood properly. Also a clear understanding of GST would help policy makers gain greater public acceptance and thus easier to migrate from the old taxation system. In the future, studies can help understand the impact of GST on other sectors as well along with ex post impact analysis of GST on the economy.
REFERENCES
1. Chaurasia, P., Singh, S., & Sen, P. K. (2016). Role of Good and Service Tax in the Growth of Indian economy. International Journal of Science, Technology and Management, 5 (2), 152-157. 2. Empowered Committee of Finance Ministers (2009). First Discussion Paper on Goods and Services Tax in India, the Empowered Committee of State Finance Ministers, New Delhi. 3. Hamdani Rizwana. GST and Indian Economy. International academic Institute for Science and technology. 2016; 3(9):1-6. 4. Khurana, & Sharma, A. (2016). Goods and Services Tax in India-A Positive Reform of Indirect Tax System. International Journal of Advanced Research, 4 (3), 500-505. 5. Kumar, N. (2014). Goods and Services Tax in India: A Way Forward. Global Journal of Multidisciplinary Studies, 3 (6).
