In this blog post, Mandvi Singh, a student at Campus Law Center and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discuses the implications of GST on the automobile industry.
INTRODUCTION:
The Goods and Services Tax Bill (GST) was passed recently, it received the assent of President Pranab Mukherjee on the 8th of September, 2016. The Bill with its passing follows with positive implications for the automobile industry. Being divided under the two heads of Centre and State, several taxes that are applicable at this time will be assimilated under these two heads.
The current industrial situation shows how highly the automobile industry is taxed at this point. Almost 77% of the whole is levied on the cost of the vehicle itself with the remaining posed around it. With cess levied by the Finance Minister of various percentages on different vehicles, the prices of cars have gone up. The categories of the same have been enlisted in the next to next topic. When the budget was being presented by the Minister in Lok Sabha, he spoke of the affliction on air pollution that these vehicles have and pointed out how perhaps the cess will reduce the power in hands of people to purchase such vehicles and opt for public transport instead.
The GST Bill:
The GST Bill was passed in form of the 122nd Amendment to the Constitution. It is the widest reform in the indirect tax structure of the country. The GST is working towards a more viable approach when it comes to tax, which is applicable in the manufacturing process. The tax under the new regime which the manufacturer has already levied in the manufacturing process in deducted when the final product created by the manufacturer is produced in the market. Hence the tax on products in overall reduced as the tax otherwise charged on the final product does not include the pre charged one. The same process is followed on the level of the wholesaler who sets off the tax when he purchases the good from the manufacturer and releases them in the market. The product passes from the wholesaler to the retailer, the retailer after adding value to the product again sets off the tax when releasing the goods finally in the market. In this chain of passing the goods from one to another, the tax sets off at every level, releasing a bit of pressure on all the people on the respective stages. Hence, when the final product is released, the overall value of the good when taxed has a marginal variation in favour of the consumer as compared to re-existing rate of taxes. The double-tax burden is being eliminated in this regime as taxed that may have been charged and again charged on the tax that was already paid has been done away with.
This is the same sort of implication that is there on the automobile sector. The sector though has variations as per the type of vehicle depending on the size and emissions by the same.
TAXATION IN AUTOMOBILE INDUSTRY:
The Society of Indian Automobile Manufacturers (SIAM) has requested the Government to club all the taxes presently levied under one main excise duty. As per the society the automobile Industry is the highest taxed industry in the country.
In the beginning of the year the Finance Minister proposed cess on different vehicles of the following percentages:
- 1% on small, CNG and LPG cars.
- 2.5% on diesel cars of a certain capacity.
- 4% on SUVs and High Powered Vehicles.
With this, the highest impact will be on diesel vehicles. Petrol and vehicles in the 1st category with length not more than 4 meters and capacity not exceeding 1200cc attract the least cess.
There are vehicles exempted from this cess: electrically operated vehicles, three-wheeled vehicles, hydrogen vehicles based on fuel cell technology, vehicles used solely as taxis, the ones used by physically handicapped persons, hospital ambulances. These are vehicles of utility not owned by the public at large, most do not contribute to any pollution or traffic at all and ambulances which do not qualify as small clean vehicles as they are a health saving asset.
The current taxation technique is complex and and leads to obligations being created. The current excise duty for vehicles is divided into four slabs and the lowest tax rate in implicated on small cars i.e. the 1st category. When the regime comes into play several taxes will come under Central and State GSTs. In the former for the automible industry excise duty is included and in the latter category taxes like the registration tax, the sales tax and the road tax will all be combined in one shell. The vehicles prices are expected to fall and this wil increase the demand for vehicles. But this will happen mostly for small lesser polluting vehicles.
Currently when the manufactured goods are removed, excise duty is paid under the excise law and VAT is paid at the time of sale of vehicles. As per the GST law the time of supply of goods will be at the earliest point, unlike the current trend.
IMPLICATIONS OF GST ON THE INDUSTRY:
The efficiency in operations is expected to swell. The same impact is expected on compliance. Operation will also be more efficient, as the whole country instead of the scattered market will be treated as one market and be taxed the same way. Purchase will increase and so will overall economic activity. This may even give way to a stronger GDP. There are also a variety of valuation disputes that are being faced by the automobile industry right now. Sale below cost of market penetration, manufacturer retained State Industrial Promotion Subsidies. Excise includes the valuation of post-sale discounts which will be removed once the GST is implemented. The Bill also treats automobile industry job as service and will continue to maintain their excise procedures the way they continue to be.
The job work process is the backbone for automobile industry operations. The Model GST law treats ‘job work’ as a service and seeks to maintain existing excise procedures for the job work transactions, i.e. non-taxability of job work transaction and providing credits to the principal for supplies to job worker, 180 days condition for bringing back goods after job work, etc. However, some more clarity is needed in the conceptual framework for this.
The Ownership of tools for the manufacture of parts of these automobiles has been transferred to OEMs and the value is also taken from them whereas the tools are kept with the vendors. There will be a change in this as under the GST capital good definition includes only those goods which are used at the place the goods are supplied at. The other major benefit of GST is expected to be easing out of various bottlenecks and complexities involved in transportation of goods using road logistics from one state to another. Since CST will be subsumed in GST, companies will no longer be required to have depots/warehouses at multiple locations and also do away with C&F agents.
Moreover the overall compliance burden is expected to decrease and bring lot more efficiency in operations. From the Indirect tax prospective the whole country will be treated as ‘One Market’ and will add to operational efficiencies. One could expect the logjam at check post, etc. will get eliminated.
CONCLUSIVE ANALYSIS: With the introduction of GST, taxes move from the Origin State to the Consumption State due to which overall economic activity is expected to increase and we could expect a better GDP growth that should push demand for vehicle across categories. Impact of Tax cascading will also go away that will reduce overall cost of vehicle manufacturing as all taxes on input paid will be offset with the output liability of GST.
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