GST will allow the auto sector to explore options for optimisation of total delivered costs
While the government is working to ensure GST roll out by April 2017, the industry is grappling with many unanswered questions. The auto sector has also not been immune to issues emanating out of the model GST law released by the government in the month of June earlier this year.
Overall, GST is expected to offer optimisation of credits by removing the cascading effect of central and state taxes, possibly reducing costs for auto OEMs as well as dealers. However, for auto industry, much depends upon the GST rate structure for passenger vehicles. Today, passenger vehicles have a varying central excise duty structure, depending upon the length, engine capacity, etc.
While cars with smaller engine capacity and length of less than four meters are subject to an excise duty of 12.5%, large cars where length crosses four meters, and/or engine capacity crosses 1200cc, the rate of excise duty can be 24%. For SUVs, the rate of excise duty is as high as 30%. On top of this, VAT/ CST is levied on sale of the vehicles. Thus, the cumulative taxes on domestically manufactured vehicles can range from 25-26% to 45% approximately.
Under GST, it will be interesting to see the kind of rate structure that the government decides for passenger vehicles. It is possible that certain segments of vehicles may be subjected to standard rate while other categories are subject to a higher ‘demerit’ rate. However, whether the distinction will be based on engine capacity or market value or any other parameter remains to be seen.
Apart from the rate of GST, there are many other aspects of the model GST law which are presently ambiguous or unanswered, and may become potential pain points for the industry.
One such issue is on transition provisions under GST. As per the model GST law, during transition to GST, a registered taxable person shall be allowed to take credit of only such goods which were eligible for credit under the both the regimes. What emanates is that if a dealer has inventory lying with him on which he has already paid excise duty and central sales tax (if purchased from outside a state), then on migration to GST, the sale of such goods in the post-GST era would attract the full rate of applicable GST without any credit being given for the excise duty and CST already paid.
Given that the cumulative rate of indirect tax at a dealer level may range from 15% to 45% (depending upon the class of vehicles), unless the rules are amended, this may lead to a huge cascading impact and create a differential between stock purchased prior to and after GST. Thus, auto OEMs and dealers need to carefully watch out for the developments on the transition provisions, and if required, plan out inventory levels during GST implementation to minimise any adverse tax impact.
Another issue which is likely to trouble the industry, and dealers in particular, is that GST will be required to be paid against advances received against sale/supply of goods. Under the current indirect tax regime, advances received against sale of goods are not subject to VAT. However, if GST will be imposed on such transactions, it will lead to the advance amounts going up potentially by 20-40%. A related issue is that there is no clarity under the model GST law on what will happen upon cancellation of advances. Whether a suo moto credit will be given or the tax payer needs to claim refund?
An interesting aspect about GST compliances would be that for the first time, all business transactions will be mapped online. For this purpose, transaction level-wise details will need to be uploaded on the GST Network while filing of monthly returns. One critical part of this entire process is that input tax credit will not be allowed to a taxpayer unless his suppliers of goods and services have deposited the tax with the government. Thus, if any supplier has not deposited the GST, it would mean that purchasing dealer will need to reverse such credit along with interest. To keep a track of each and every supplier and ensure that the supplier is depositing the GST in a timely manner may prove to be a herculean task, especially for OEMs dealing with a large number of vendors and thus, it is possible that some level of vendor consolidation may happen in the industry during the transition phase.
Another area of concern would be the treatment of second hand vehicles. Many dealers provide lucrative schemes involving exchange of old vehicles against new purchases. Further, many industry players have set-up full-fledged showrooms only for dealing in second hand vehicles. Unless clear provisions are framed under GST for taxing only the value addition on sale of second hand vehicles, the organised second-hand car industry could be at a disadvantage compared to the unorganised sector.
The model GST law also provides that free of cost supplies by one taxable person to another taxable person will be subject to GST. This could lead to a double taxation of warranty supplies when supplied to an end consumer, unless an exception is carved out in the GST law. Similarly, supply of free accessories along with the vehicle could mean additional tax cost.
There is no doubt GST is likely to change the way industry conducts its business, and auto sector would be no different. Inter-state sourcing may increase with the removal of tax barriers in form of CST and entry taxes. GST would also end disputes with the taxman on the issue of stock transfers being treated as ‘pre-determined sales’.
GST will definitely open up avenues for the auto sector to look at their business models and supply chains more closely and explore options for optimisation of total delivered costs. From the government, the industry would be looking forward for ease in procedural compliances and upfront clarity on tax positions.
While that happens (hopefully), it is advisable for the industry to plan its transition to the GST regime in advance, so as to ensure a smooth transition with minimal business disruption on the cut over date as well as be fully compliant with statutory requirements under the GST law.
The author is tax partner (automotive practice), EY. Views are personal