26th May 2017
The automobile industry is driven by the geographies of a country and by the need that people feel to possess a car. So the automobile industry in India is one of the largest in the world.
It contributes about seven percent to the Gross Domestic Product (GDP) of India. About 4.3 percent of the total export earnings can be appointed to automobiles, while about 13 percent excise revenue is what this industry produces.
With India on the brink of the Goods and Services era, where all the taxes will be subsumed into one, it becomes necessary to foresee how this industry will be impacted.
Under the current regime, the taxation of automobiles has four slabs. The smallest cars are under the smallest slab, quite understandably.
The price of vehicles is set to go down. The proposed GST tax is about 18 to 20 percent, and is less than the sum total of all the individual taxes, so the prices will dip. Whether the small and big cars will have different GST rates is something not entirely clear. But if it happens, it will come as a relief to the middle class, which prefers to go with smaller cars owing to budget. Also, the tax cascading will be a thing of history after this. And we will have reduction of production costs because the tax credit that the manufacturer encounters will be off with the GST's output liability.
With the number of taxes set to be reduced, the compliances and paper work will reduce too. Because the nation will be free of intrastate borders, the free movement of movement and cash in the industry will make sure that the automobile industry in India works on the motto: one-nation-one market
There are some areas of gray which the government needs to throw greater light on, and some challenges which needs to be met head on. We list them below:
In the automobile industry, what the vendors do is make tools to mould or manufacture automobile parts. The ownership of such tools is transferred to the Original Equipment Manufacturers OEM, and the cost of the tools is recovered from them, too. Under the GST regime, the 'capital goods' will only be those which are used at the place of business. But here, in this case, these tools are located in the factory of the vendor to produce the parts, and so the OEMs will encounter challenges in availing credits under GST. They previously recovered the costs from the vendors but then can no longer do so now, meaning the tooling costs can be expected to shoot up.
The job work processes is one of the major tactics on which the entire automobile industry's operations are based on. Now under GST, the government treats this as a service and will continue to levy the current excise duties. Some clarification on how this will work out is required.
The automobile industry sees a lot of disputes under central excise valuation. For example, a company may tend to sell the car below the cost for the sake of market penetration. There are always about how the demo cars need to be valuated. Then there are conflicts on the advertisement charges that you recover from the dealer, the deduction of discounts after the sale is over from the excise value and so on.
This GST law carries on the concept of "transaction value". This is actually a good thing but nothing has been specified as to who can reject these transaction values, and it could lead to a lot of disputes.
Currently, excise duty is paid when you remove the vehicles from the manufacturing workshop while the VAT is paid when the vehicles are being sold. GST says that the time of supply of goods will the earliest of a number of things: Date of removal of the good, date of invoice, date of receipt of goods in the book, etc.
The advance, currently non chargeable, will also be charged under GST. This will change the timing of supply and effect major changes in how the cash flows in the industry, and the procedure of doing things becomes different. What needs to be included in the GST is the case when there are more than one invoice for the sale of vehicles.
Riders on the input tax credit will continue, it seems, even under Goods and Services Tax regime. Capital goods have been defined in accordance with the CENVAT rules. But GST says that the input tax credit will be applicable only to a certain list of goods that fall within some specified chapters of the GST rulebook.
There are a lot of different kinds of cess that needs to be paid, namely NCCD, tractor cess, infrastructure cess and automobile cess. On the first glance, it feels like all the cesses will be merged under one name: GST tax. But if you look closely, nobody knows if the cesses that apply under different legislations will come under GST or will continue to charged separately.
In the automobile industry, the two taxes levied at the consumer end are excise and VAT. Now with GSt in play, the combined average of these taxes, which comes anything between 25 to 44, is set to be higher than the GST rate, which is expected to be anything between 18 percent and 28 percent. So, on first sightings, it seems the burden on the consumer will be less.
In other good news, the importers and the dealers can now claim the GST they paid on good they have imported or sold. Right now, they cannot recover the excise duty and VAT that they pay for. But there is a lot of doubts surrounding GST will work in case of the use car industry, which makes for a heavy market in a nation that is still developing, like India.
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