Will GST prove to be a game changer for the auto sector?

For the automotive industry, the Goods & Services Tax (GST) has been viewed as one of the most important policy reforms. After much wait, the new tax is likely to get implemented from July 1. However, there is still some confusion around the new tax which need to be clarified to help the industry stakeholders understand what it has in store for them.

GST will be positive for the automotive sector because of the efficiency and removal of cascading that is expected with GST, says Harishanker Subramaniam, national leader - indirect tax, Ernst & Young.

And, to give you an example, in an automobile sector, a car is manufactured in a particular state and generally, 80 per cent of these cars are sold to states outside the state of manufacture to dealers outside the state. So the two per cent Central Sales Tax (CST) that they pay will not be there tomorrow because hopefully origin tax is not there.

Even the two per cent CST will be an integrated GST (IGST) which will be fully creditable by the dealer when he sells the car in the other state. And even from a procurement point of view, if there are interstate procurement we suffer today at 2 per cent CST which is a cost to the manufacturer, that also will not happen because those interstate procurements will have an IGST in it which is again available as a full credit to the manufacturer if the credit rules are simple and easy.

The second efficiency could be also on the input side. A bigger, more easy credit mechanism so that all the taxes on the input side, whether it is input services, whether it is capital goods, whether it is manufactured products, are set off against the output liability of GST.

One other important fact is that many car manufacturers which generally have a very large investment, enjoy today state incentives. The incentives are there in many manufacturing states like Maharashtra, Gujarat & Tamil Nadu.

So, one of the facts that the auto manufacturers have to keep in mind is that these state incentives are based on the current value added tax (VAT) and CST that they pay. Tomorrow with CST going away, the states will have to make do these commitments of incentives on the basis of whatever they collect under the GST regime. So, that is another important fact that the auto manufacturers have to keep in mind that they will have to go and renegotiate those memorandums of understanding (MoU) that they have with the states.

The second fact is today, in the car industry the small cars have a differential treatment in excise depending on engine displacement and the size That is another factor that will come into play. Will those differences exist in the new GST regime? Will they all fall under a standard rate of 17-18 per cent if you take the reference of the current CEA report or will there be a lower rate for small cars? This is another question that comes to be debated because then the efficiency and the quantum will depend on what rates they fall in.

So does this effectively mean a lower tax burden for automobile companies? Some of which would go towards their bottom line and some maybe could get passed on to consumers or not at all?

Purely on efficiency, there should be a benefit to an auto manufacturer, notes Subramaniam of E & Y.

With no embedded tax costs on inter-state movement of goods and a shift in the point of taxation to the ultimate consumer under GST, businesses would have enhanced flexibility to re-design their supply chains. Moreover, importer-distributors as well as domestic automobile dealers should be able to claim credit of GST paid on all business procurement of goods and services, as opposed to the current scenario, where they cannot claim a credit for the Excise duty paid on capital assets or Service tax paid on input services availed, and which, therefore, is a cost.

The introduction of GST may also lead to further consolidation of operations in the Indian auto sector, with the likely neutralization of indirect tax benefits of a separate sales/distribution entity due to levy of CGST proposed to be extended up to the point of consumption.

Get prepared for the big change. GST could throw up some unique challenges for the automotive sector. For example, — taxation of used vehicles and trade-ins under GST could be complicated and lead to double taxation of the vehicle unless appropriate rules are drafted with regard to the same.

Lastly but perhaps, most importantly, businesses need to plan ahead for timely implementation of changes required in their ERP and financial reporting systems, to ensure minimal business disruptions during transition.

If you look at the current scenario, the indirect tax regime for the automobile sector in India is perhaps one of the most complex and multi-layered, with several Union and state levies applicable to different stages of supply chain such as Customs Duty on imports, Central Excise on manufacture, VAT and/or CST on sales, Service tax on import/provision of services, additional levies such as NCCD, Automobile cess, Entry taxes, Octroi/LBT, registration charges, road taxes etc. Furthermore, luxury vehicles are typically subjected to high tax rates of Central excise and VAT.

The introduction of GST could be a key business change driver.