In the pre-GST era in the automotive industry, the central sales tax applicable on interstate sales to tier-1 suppliers used to translate into cost, under GST the same would attract IGST, which would be creditable in the hands of tier-1 suppliers. This is one of the many ways the sector will benefit from GST. Priyajit Ghosh, partner, Indirect Tax, KPMG in India, shares with FE’s Vikram Chaudhary how, in the long run, will GST affect the Indian automotive industry. He also adds that automotive R&D is likely to become more efficient on account of simplification of taxes and faster tax refund processing. Excerpts:
Even though tax rates on passenger vehicles haven’t changed much pre- and post-GST, most companies have reduced ex-showroom prices of their products. Why?
Lower ex-showroom prices post-GST are likely on account of savings in tax cost on procurements and reduction in output tax rates on motor vehicles. Lower prices are also on account of savings owing to reduction in cascading effect of taxes (for example, VAT used to get charged on excise component as well, resulting in chargeability of one tax on another and increase in effective rate of tax).
Further, a manufacturer used to pay 5% R&D cess on royalty, which was not allowed as credit, hence becoming a cost. The R&D cess has been abolished, leading to savings in tax cost.
Do these lower prices apply to imported cars too?
Besides levy of basic customs duty and cesses thereon, the taxation structure under GST is similar for imported cars as well as cars manufactured (including assembled) in India. Accordingly, imported cars are also likely to benefit on this account, including reduction in output taxes and savings in tax cost on procurements.
Does GST change the typical price difference between ex-showroom and on-road prices of a vehicle vis-a-vis the outgoing tax structure?
Yes, but marginally. The difference between ex-showroom prices and on-road prices is due to various components, such as delivery charges, registration, insurance, road tax, etc. Components such as delivery and registration (not road tax, insurance, etc) did not attract levy of VAT or excise duty. Under GST, while taxation of some components may remain the same (such as road tax), some components like delivery charges are likely to attract GST.
A few two-wheeler models have become dearer after GST. For example, Royal Enfield’s 350cc motorcycles have become cheaper and 500cc expensive…
The reason for increase in prices of some motorcycles may be on account of levy of an additional cess of 3% applicable for over-350cc motorcycles, i.e. 31% (28%+3%) as compared to around 27% of output tax.
In that case, all premium motorcycles, such as those made by Harley-Davidson and Triumph, would become dearer, since all are above 350cc…
Yes, most premium motorcycles would fall under the bracket of over-350cc and would attract additional cess of 3%. Accordingly, based on pure output GST incidence, prices are likely to increase. However, there may be savings on account of input taxes on such products—for example, central sales tax (CST) applicable on interstate sales to tier-1 suppliers used to translate into cost, under GST the same would attract IGST, which would be creditable in the hands of tier-1 suppliers. The impact of all these factors would affect prices differently for different players.
In the long run, how will GST affect the Indian automotive industry?
The industry is likely to benefit owing to various reasons:
*Reduction in cascading effect of taxes: VAT used to be charged on excise component as well, which would not be the case now, as these taxes get subsumed under GST. Also, taxes paid on services by dealers used to became cost, but now they are creditable under GST.
*Reduction of compliances and complexity around the law: In the pre-GST regime, automobile industry was required to comply with laws of various states, which, in many cases, differed significantly. However, under GST, although there would be different SGST Acts, they are likely to be similar for almost all the states.
* Simplification in the supply chain structure: For example, consolidation of warehouses resulting in lower logistics cost, and economies of scale from consolidation of warehouses.
* India as one market for tier-1 suppliers: Earlier, tier-1 supplying from outside the state to OEMs were uncompetitive, because they had to pay 2% CST, which was not allowed as credit to OEMs. Under GST, there will be IGST on such interstate supplies, leading to a level-playing field with local suppliers, hence they would be able to access OEMs on a pan-India basis.
How will automotive R&D get affected?
Automotive R&D is likely to gain efficiencies on account of simplification of taxes and faster tax refund processing. In case of exports, 90% of total refunds would provisionally be allowed to the taxpayer within seven days, resulting in reduction of short-term working capital burdens.
With GST, how will vendor tooling in the automotive sector get affected?
Vendor tooling consists of moulds, dies, jigs and fixtures (but not machinery and equipment) used by suppliers to make parts for their OEM customers. Vendor tooling has followed a logistically inefficient model in the past, owing to tax considerations. For availment of credit of input taxes paid on procurement of these tools were first required to be bought in the factory before shipping them to tier-1 suppliers. Under GST, credit of input taxes paid on such tools can be availed even when these tools are shipped directly to the tier-1 supplier without getting those in their factory, thus likely to derive benefits from logistics-related efficiencies.
Further, credit of these tools (where they were considered as capital goods) was available in a period of two or three years, but under GST full credit of input taxes can be availed in the year of the receipt itself, resulting in reduction of short-term working capital burdens.