Auto Sector GST Confusion One year
One hopes that in the near future, the Government would be able to iron out the issues and help the industry in truly capitalizing on the opportunities that the GST regime presents for India.
With the Goods and Services Tax (‘GST’) regime in India nearing completion of its first 12 months, it is probably an apt time to take a look back at the various ups and downs of the regime and their impact on one of the key sectors of the Indian economy – the automotive industry.
The Indian automobile industry has historically been one of the highest taxed sectors from an indirect tax perspective. With the increasing pressure on domestic demand, the auto OEMs were hopeful that the introduction of GST would reduce the overall tax burden on vehicles, which in turn will boost demand. However, the last minute introduction of an additional levy in the form of Compensation cess ensured that the effective tax rate on vehicles did not change significantly versus the previous regime.
One thing that definitely did not go down well with the industry was the frequent changes in rates of Compensation cess during the past 10 months. The same led to business disruption as well as confusion for the end consumer as OEMs had to revise prices often on account of tax rate changes.
At the time of introduction of GST, there was a uniform rate of GST prescribed at 43% (28 % GST +15 % cess) for specified sedans and SUVs, which was comparatively lower than the effective rate range from 46.6% to 55.3% during the erstwhile regime. The rates currently range between 43% (28 % GST +15 % cess) to 50% (28 % GST +22 % cess) depending on type of motor vehicles, instead of a uniform rate as notified earlier.
The consumer’s dilemma can also be seen from the complaints filed in some instances to the anti-profiteering authority, alleging that vehicle prices were not reduced by dealers to the extent of tax cost reduction. Though, in the report recently released on one such complaint, the investigating authority found that the passenger vehicle dealer got a limited benefit of 2 to 3 percent due to introduction of GST, which he had already passed on to the consumer.
Given that the Government has kept with itself, the power to further increase the compensation cess to a maximum of 25 percent, in addition to the 28 percent GST, means that automotive prices could see an increase in the coming future.
Also, no incentives in form of GST concessions/ exemptions have been given for hybrid and electric vehicles, unlike the erstwhile regime, which appears to be in stark contrast to the Government’s recent focus on fast adoption of electric vehicle technology by OEMs.
Further, the increase in GST rates for services to 18% and spare parts to 28% has made after sales repairs and maintenance costlier for the consumer.
Despite the various tax rate related issues, one cannot deny that the simplification of the tax regime by unifying roughly 17 different central and state levies into a single type of tax, ie GST, has been beneficial to the industry by reducing the compliance burden, and leading to better transparency for the end user.
With the removal of state border VAT check posts, the time incurred on logistics has also been cut down. However, the industry is apprehensive that introduction of e-waybills for both inter-state and intra-state movement of goods could again lead to creation of check points and thus, delay supplies. Further, the newly introduced E-waybills provisions have added significantly to the compliance burden of businesses. Even large established auto industry players are finding it difficult to cope up with such additional burden especially on account of lack of clarity in law on treatment of various business transactions, IT system issues, reliance on logistic service providers for completion of details and the nascent concept of limited validity, depending on distance to be travelled.
Other key challenges that the industry has faced in the last 10 months are delays in export related input GST refunds as well as the lack of clarity on the fate of VAT/ CST linked state level incentives that various State Government had promised to the OEMs setting up plants in their States; the quantum of such incentives has got significantly impacted due to subsumption of CST into GST as well as the SGST rate being much lower than the VAT rate under the earlier regime.
Along with the challenges, of course, opportunities have also arisen for the auto industry to streamline supply chains and optimize on warehousing and logistics costs. This could help reduce operational costs and realizing India’s vision of one National Market.
In a nut shell, the first year of GST has been a mixed bag for the auto industry. One hopes that in the near future, the Government would be able to iron out the issues and help the industry in truly capitalizing on the opportunities that the GST regime presents for India.