Impact of GST on Indian auto industry

After an almost seven-hour long debate, the Goods and Services Tax (GST) Bill was passed by the Rajya Sabha on Wednesday. The finer details of the bill haven't been worked out yet. However, Finance Minister Arun Jaitley has given an assurance that final tax amount won't be unreasonable. According to our sources, the GST is expected to be around 18 per cent.

The GST debate has been going on for months now, and not many people are aware of its finer nuances and the consequences of its implementation. The concept behind the GSTBill is to implement just one single tax across the country. As we all know, currently, multiple taxes like VAT (Value Added Tax) and excise duties are being levied on goods and services. For the auto industry, the implementation of GST would result in manufacturers paying lower taxes and the customers may also be benefitted.

Once the GST gets implemented, it will absorb many of the currently levied state, central government and local body taxes. The biggest difference is that GST will be charged where the goods are consumed and not where they are produced. Currently, all states have levied many indirect taxes on the movement of goods like entry tax, purchase tax, state VAT, cesses and surcharges. So all trucks carrying new bikes and cars from the factory to the dealership have to pass through multiple checkpoints en route to pay taxes to the states. With only one tax to be paid, movement of goods is expected to become easier and faster.

With respect to taxation and duties, cars have been classified into four categories - small cars with petrol engine capacity below 1,200cc and under four metres in length, mid-size cars with petrol engine below 1,200cc and diesel engine below 1,500cc, luxury cars with engine capacity of 1,500cc and above, and SUVs with engine capacity above 1,500cc, 170mm of ground clearance and longer than four metres.

On small cars, a total tax of around 28 per cent is levied currently which includes VAT and excise duty while for mid-size cars, it's around 39 per cent. Once GST gets implemented, the total taxes levied on cars is likely to be reduced.

It appears that the GST implementation will favour those automobile companies who manufacture their products in India. The locally manufactured vehicles are likely to get a cost advantage owing to lower taxation. For automobile companies relying on the CBU route, there won't be any benefit.

Commenting on the impact of the GST on the automobile sector, AK Rastogi, GM finance, Nippon Audiotronix, said, "GST will be positive for the automotive sector primarily because of the removal of cascading effect of tax on the cost of goods and services. Currently, most of car manufactures are located in few of the states in India. When they sell car to other states, they charge 2 per cent CST, which is currently included in the cost of the car as it is not creditable. However, in GST regime, credit will be available."

"Currently MRP-based payment of excise is applicable on accessories leading to higher landed cost. In the GST regime, it will go away. Since all indirect taxes will be subsumed, companies would need to bring in significant change in processes, training teams and developing IT systems for being GST compliant. It's a wrong perception that the prices are likely to rise; in fact, the prices will be reduced which will ultimately benefit end customers. It is unlikely to have negative impact on the demand of product," he further added.

Yadvinder Singh Guleria, senior vice president, sales and marketing, Honda Motorcycle and Scooter India Pvt Ltd, said, "The GST is definitely one of the most important tax reforms in the history of India which was closely tracked by each and every one this monsoon session of Parliament... The new simplified and uniform tax structure will reduce the cascading effect of tax-over-tax and provide a 360-degree ease-of-doing business for the complete automobile ecosystem, be it suppliers, manufacturers, dealers and most importantly customers who will get the benefit."

The implementation of GST could also provide a much needed boost to the electric vehicle industry. Sohinder Gill, director of corporate affairs, Society of Manufacturers of Electric Vehicles, said, "Currently, the tax levied by state governments on green vehicles vary between zero to five per cent. Only Uttar Pradesh, Punjab and Bihar charge more than 14 per cent. Road tax is almost nil in majority states. If we consider the average VAT levied on green vehicles across India, it comes up to approximately four per cent. We hope as the bill progresses, the government should keep it either at par or at a lower rate than the current tax structure, for a certain period. If the government manages to do it, it will definitely revive the electric vehicle industry in India."

The Society of Indian Automobile Manufacturers has raised a few concerns regarding GST on the industry's behalf. It has asked the government to make a provision in the law that no new levy or tax will be introduced post GST implementation. The apex body has also commented that the used vehicle trade should be brought under the GST framework to make it more organised.

The GST is yet to be approved by the state assemblies. Once approved, it will be implemented from April 1st, 2017.  GST is already in place in New Zealand, Australia and many Asian countries.