Automobile Sector or the Automobile Industry (auto sector / auto industry in short) is one of the largest, growing and dynamic sectors in the Indian economy. To emphasise its significance in the Indian economy, during 2015-16 for which data is available, the auto sector accounted for 7.1% of country’s GDP and provided employment (direct and indirect) to 29 Million people. Most major global automobile manufacturers now have their manufacturing facilities in India. The auto sector, including the vehicle manufacturing activity, is spread over a number of States in India making it a very crucial contributor to exchequer in almost all the States.
The auto sector comprises of Automobile Manufacturers (OEMs) who manufacture Motor Vehicles, Auto Ancillaries supplying components to the OEMs, the Dealers of OEMs and providers of associated services for vehicles. This article intends to focus on the GST implications from the OEM perspective. The Automobile manufacturing broadly has for segments – passenger cars including utility vehicles, commercial vehicles – for goods & passenger application, three wheelers (again for goods & passenger application) and two wheelers. Just to give an idea about the numbers, the Gross Turnover of the Automobile Manufacturers in India during FY 2015-16 in terms of US Dollars was 63,866 Million which increased to 67,724 Million in FY 2016-17. While the data on Gross Turnover for FY 2017-18 is not available, during FY 2017-18, the industry produced 29.07 Million vehicles, higher than any of the earlier years. This makes it one of the largest players in the world in each of the segments. The auto sector also has strong presence in exports and 4.04 Million vehicles were exported from India in 2017-18. In terms of number of vehicles, two wheelers are by far the most popular form of vehicles sold in India, accounting for 81% of Domestic Sales and 80% of the vehicles produced in FY2017-18. (Source siamindia.com Statistics)
Auto sector’s operations are somewhat complex from tax angle. Under the pre-GST provisions, the sector on the whole had complicated tax structure in terms of multiple taxes with diverse provisions, multiplicity of classifications & rates, cascading effects, issues on set off of taxes suffered at earlier stage, valuation issues etc., besides being subjected to fairly high rate of taxation, generally varying somewhere between 28% and 56% of price. The sector has always welcome and supported the concept of value added taxation around which GST is built, despite challenges in implementing such a major change, in anticipation of having simple & rational tax structure under GST and also rational rates of taxation on its products. On review of actual year one working under GST, the impacts thereof on OEMs are seen as both positive and negative, though the extent of such impact would vary between the segments referred to above depending on their existing business processes and tax structure & issues. The GST implications from OEM perspective and expectations from GST, both positive and negative, and some of the pending issues that need attention are dealt with below under different headings / areas of possible impact and in doing so, the changes brought about through the subsequent Notifications have also been considered.
Tax on the end customer:
(a) Subsuming number of taxes into two taxes – CGST & SGST, with uniformity of legal provisions across States, common tax base for both taxes avoiding cascading of tax on tax, as well as doing away with valuation methods like Rule 10A and MRP based valuation for spare parts, are major positives. On the negative side, State level Vehicle Tax/ Road Tax is not subsumed in GST despite strong recommendation from auto industry and will continue to be extra cost to the end customer. Moreover, this tax would remain in State domain and States may be tempted to hike the same for revenue considerations.
(b) The multiplicities of classifications and the possibility of consequent disputes is reduced. However, due to cess levy & flexibility available to the Government in fixation of its rates, multiple rates still prevail which need to be restricted to minimum, ideally to two rates (other than concessional rates specifically provided).
(c) Under the earlier tax regime, Central Excise Duty and CST were not payable on transportation cost of vehicles directly sold from OEM factory to dealer, which was a common distribution practice for cars and two wheelers. Due to concept of composite supply, post GST, such transportation cost (which is a sizable amount) suffers tax at same rate as applicable for the vehicle. Similarly, under GST, the final price to the customer is subjected to full tax incidence against Central Excise Duty which was not applicable on trading margins. These two changes have the effect of broadening the tax base.
(d) High rate of tax on Passenger Cars, other than those which merit classification as small car, has been one of the grievances of the auto sector. In the tax rates initially notified under GST, taking cognizance of this, the rate of tax on high end Passenger Cars and Utility Vehicles was significantly lower compared to existing rates and some benefit was also offered in rate of tax on mid-size cars compared to earlier rates. However, by Notification No. 5/2017 – Compensation Cess (Rate) dated 11.09.2017, the Cess on these Cars was increased, substantially nullifying the above benefit. A table showing combined rate of revised tax under GST vis-à-vis pre-GST rate on major categories of vehicles is attached as Annexure A. The GST rates would apply on a wider base value, as mentioned in (c) above. It will be seen that the change in rates is marginal if we consider the increase in base value. Thus, the issue of higher rates of tax on cars remains mostly unaddressed.
(e) The concessional rate of tax for Hybrid Cars (other than those meeting small car criteria) in earlier tax regime has been withdrawn in GST and they are subjected to tax @43%, which is a major set- back to the upcoming segment.
(f) As regards post sale repairs and servicing, there is ambiguity on its tax treatment due to composite supply concept. Government needs to confirm its acceptance on the current industry practice of treating spare parts / material used as supply of goods and labour as supply of service rather than treating the activity as composite supply which would be very subjective and dispute prone.
(g) Though this is not auto sector specific, limiting the value and rate of tax applicable on supplies of old and used vehicles is a welcome step as the same would restrict the double tax incidence on same goods (Reference Notification No. 8/2018 – Central Tax (Rate), Notification No.9/2018 – Integrated Tax (Rate) and Notification No. 1/2018 – Compensation Cess (Rate), all dated 25.01.2018).
Impact on the State Incentives / Subsidies and on Area based Central Excise exemption:
(a) The State Governments have either not come out with policy on how they would deal with the issue in changed tax structure under GST or have restricted the quantum of benefit to SGST, thereby denying benefit on inter State supplies. This is a major negative implication for companies who made major investments in specific states keeping in mind a particular level of incentive / subsidy they would get. State Governments need to address this issue and protect the quantum of incentives.
(b) Number of OEMs and their ancillary vendors were attracted to Uttarakhand, mainly in view of the Central Excise Duty exemption scheme. While some of them have completed the period of exemption benefit before introduction of GST, some were / are still within benefit period. The exemption which in effect entailed benefit equal to 100% of Excise Duty on value addition stands withdrawn with introduction of GST. The compensation provided by the Central Government in lieu thereof in the form of budgetary support broadly works out to amount equal to sum total of 58% of CGST paid through debit in cash ledger and 29% of IGST paid through debit in cash ledger ( in both cases after utilization of Input Tax Credit of Central Tax and Integrated Tax) – again a negative impact for auto sector.
(a) The auto sector has revamped its internal tax function in line with requirements under the GST regime and put in extensive efforts in setting up new internal processes, new accounting and IT system to comply with GST requirement after study of GST law and in particular some new concepts therein. Extensive effort has also been put up in re-working of product pricing and cost implications at vendor end as well as on training – both internal as well as for vendors and dealers.
(b) Easier compliances in some matters like uniform legal provisions across states, lesser classification issues, no forms collection, no GAQ computation on stock transfers, no Section 4A / Rule 10A valuation, no issue of pre-determined sale etc. reduce the compliance effort.
(c) However, the experience is that the overall compliance effort has increased due to requirement of matching input tax credit to tax payment by vendor as well as due to requirement of paying full tax and availing credit at corresponding location on all internal transfers of goods or services and need to strengthen the tax function at locations like depots, branches etc. to take care of this aspect. Compliance of antiprofiteering provisions is another new area for compliance.
(d) In auto sector, it is common practice to collect payments against supplies in advance and considering the operating complications, compliance of requirement to treat point of receipt of advance as time of supply involved lot of efforts. Vide Notification No. 66/ 2017 – Central Tax dated 15.11.2017 the said requirement with regard to advances received has been dispensed with for goods which is a positive development for auto sector.
(e) On the procurement side, the retrospective price amendments are frequent. The practice during the pre-GST period was to issue combined debit / credit note for the same i.e. one document covering number of earlier supplies. Requirement of one debit note / credit note per corresponding original invoice results in sizable increase in administrative effort in accounting for such transactions.
(f) Number of companies in auto sector had taken registration under LTU and Centralized Service Tax Registration mainly to facilitate centralized administration. Absence of such arrangements has led to completely decentralized tax administration at registrations in respective States, under different authorities, Central or State, with possibility of different views being taken by the authorities on the same issues. This is a matter of concern for auto sector as most companies have registrations in several States.
Overall Conclusion: After almost one year of working, the implications of GST on auto sector have been both positive and negative (leaving aside the teething problems), as discussed earlier. Besides, as stated earlier, they vary from segment to segment and even within subsegments. A comparison of performance of Auto Industry during FY 2017-18 in terms of numbers vis-a-vis FY2016-17 is given in Table attached as Annexure B. While it shows good overall growth in numbers under the selected criteria, one has to understand that such changes are reflection of a number of more important factors such as economic conditions, changes in market conditions, differences in conditions & specific issues in years being compared and taxation is just one of the factors having bearing. Besides the comparison is in numbers and the overall respectable growth number is reached through relatively better performance in two wheeler and three wheeler segments. However, based on these figures, within limitations of what has been mentioned of such comparisons, one can conclude that the overall impact of GST on auto sector in it’s very first year has not been negative and the sector despite the initial issues has migrated to the new tax system with the extensive efforts put in for the same. There have been negative implications and areas of concerns on which auto sector has been representing to the Government and positive response thereon will help growth of the sector and strengthen its position and contribution to the economy.