GST has been the buzzword in the country for the last few days and finally the bill has passed, leading to the realisation of “One country, one tax”, at least on papers for now. While the GST in general is going to benefit various industries and the economy, in this article I've tried listing down the key benefits for the automotive industry and the end-consumers. However, like every coin has two sides, the GST too has some negatives and hence the headline.
In order to get a second and well-informed opinion, I checked on the benefits of GST with Deepesh Rathore, Co-Founder & Director – Emerging Markets Automotive Advisors (EMMAAA) and was told that “GST is a favourable step and brings in clarity on the taxation regime, at least one area of legislature where we now have clarity.” He added, “GST is also an important step considering many India-based car and two-wheeler manufacturers are now setting up multiple plants across different states with plenty of components and finished goods moving across state borders.”
The way we're taxed presently
Presently, in the regime of indirect taxes, vehicle makers are exposed to Central Excise Duty, Service Tax, Value added tax and Central Sales Tax. Once the GST is implemented, all these taxes could get absorbed in the GST itself, making taxation a much simpler process to understand and implement. Add to this various cesses such as Swachh Bharat and Krishi Kalyan and the end-consumer's taxation burden can range anywhere between 20% to more than 40%, depending on the vehicle's classification and size. Excise duty for sub-four metre cars is pegged at 12.5 % but when adds up all the other taxes and cesses, the figure is in the 25 % ballpark.
Let's take an example from the carmaker's end as well, wherein a plant makes cars in one state and a majority of the total production is sold outside the state of origin. Hence, the carmaker ends up paying Central Sales Tax, which after the implementation of GST wouldn't be there as indirect taxes such as Central Sales Tax will be absorbed by GST.
Yadvinder Singh Guleria, Senior Vice president, Sales & Marketing, Honda Motorcycle & Scooter India Pvt. Ltd also voiced a positive statement, saying “The GST rate and other terms of the tax are yet to be finalised. However once implemented, we expect the effective tax rate to come down (from the current 28% - 35% taxation rate as the two-wheeler sector faces as many as 13 different types of taxations). The new simplified and uniform tax structure will reduce the cascading effect of tax-over-tax, provide a 360 degree ease of doing business for the complete automobile ecosystem.”
The way we hope to be taxed after GST
Preliminary reports and data suggest an 18% tax rate for compact cars, which compared to the present 25% or so would mean a reduction of around 8%. On cars such as the Maruti Suzuki Ciaz and Renault Duster, the GST tax rate would be around 20%, which will mean a massive reduction from the present figure of around 40%.
Luxury cars could be taxed at about 40%, a relatively high number but compared to the present number in excess of 50%, luxury vehicle makers too have a reason to rejoice, no matter how small it may be. As a result of this taxation change and numerous other taxation efficiencies arising within the supply chain of these vehicle makers, the cost of vehicles is set to go down. With such a significant price-reduction, it's obvious that the benefits will be passed on to the end-customer, lowering vehicle costs anywhere between 8% and 25%. The catch to this is to know when it's the right 'next time.'
Commenting on the GST's benefits on the automotive sector, Sumit Sawhney, Country CEO and Managing Director, Renault India Operations, said “GST is expected to drive overall consumer demand since the cost for the logistics and supply chain inventory will be curtailed by almost 30-40%, the benefits of which are expected to be passed on to the consumers. As next steps, the focus will be on establishing a robust infrastructure and harmonizing the licensing and environmental regulations across the states.”
The GST, although passed, is set to come in effect from 1 April, 2017, which means the Central Government has a long and tough task of coming to agreeable terms with the State Governments. Only then we'll be able to realise the benefits listed above out in the market and it would be a massive downer if the government fails to bring this bill to its conclusion after more than a decade of discussion at the cost of the tax-payers money.
Why you're better-off not buying a vehicle right now
If you are someone who's looking at buying a car in the near-future, it's a no-brainer that your mind is already clouded by doubts and rightly so. If you do go ahead and buy a car in 2-4 months, you'll go through Buyers Remorse in all likelihood as just months later the brawny SUV you bought could be priced lower by around Rs 2 lakh in the worst-case scenario. Reasons to regret however won't just end there as your existing vehicle's resale value too will follow gravity, albeit at an accelerated pace. So should you defer your car-buying decision till April, 2017? All logical conclusions suggest a resounding yes but bear in mind that all these price-reductions will be possible only if the Central and State Governments get their act together in the specified timeline.
For the carmakers, the GST is undoubtedly a good news but till it gets implemented, they run the risk of losing sales as people may hold on to their car purchase till April, 2017. With the festive season around the corner, the gravity of this trend only seems to compound further but in the long-run the GST is set to benefit each one of us, beyond the automotive industry and more. In the end though, the customer wins and remains the king. Now let's hope the GST implementation doesn't hit a roadblock.