The 14-year-long journey of Goods and Service tax (GST) finally culminated on July 1, 2017 with the implementation of the biggest tax reform of India in the 70 years of its independence. While the government of India, under the leadership of Hon’ble Prime Minister Shri Narendra Modi, hailed the introduction of a ‘Good and Simple Taxation System’ for the benefit of common people, small traders and industry as a whole; the opposition parties have slammed the establishment for forcing a half-baked GST regime over the taxpayers.
The whole issue about the impact of GST on the auto industry hovers around the compliance of the new taxation system by the sector as a whole. The outlined benefits of GST on the auto industry are primarily simplifying logistics and constraining the operational and manufacturing costs, while the compliance is something that the industry is varied about.
How easy or difficult is the GST compliance?
To understand this, we can draw an interesting analogy between GST and driving a car on road. As the speed of your car depends on the car in the front and at the rear, the compliance of GST would depend on the use of GST by the vendors and the buyers alike. Your vendors are cars in the back and your clients are the cars in the front.
As you need to have a close eye on the rear view mirror to ride a car smoothly, in order to reap the benefits of GST you need to take a close look to ensure the compliance of GST by both the parties you are directly linked to. Whether you are a business owner or a buyer of a car, scooter or moped, you need to be equipped to take on the GST ferry. You can use the support of ASP and GST suvidha providers authorized by the government to understand the details of compliance and related concerns.
With GST, July’17 went loudly ahead as compared to the previous sluggish months
The Single Nation Single Taxation drive has resulted in unifying 17 different taxes including various excise duties, octroi, service tax, VAT, and many more. However, a nation of more than a billion people has the ideologue ready to delineate GST as another 17th tax. The myth is widespread like a cacophony before the elephant starts to walk.
Indian Automobile Industry which envisages being the third-largest market in the world, was ushered into the new taxation regime with Pre-GST discounts on cars, scooters and bikes. The discounts poured in throughout the month of June as the Auto majors like Maruti Suzuki, Toyota, Hyundai, Honda and majority of all the other players announced big rate cuts in a race to trim their inventory ahead of GST.
Amidst all the turmoil and apprehensions, July’17 went loudly ahead than the previous sluggish months and ended with a bang for the entire industry with Maruti Suzuki, Honda Cars and Ford India grabbing the podium. While The Maruti Suzuki recorded a staggering domestic growth of 22.4% in July ’17 as against July’16 , Honda Cars too came out with flying colors with an astounding rise of 21.74%, as compared to July’16.
The initial GST ambiguities seem to be settling down and the festivity ahead will only be the icing on the cake.
To understand the impact of GST on the industry as a whole, you need to understand its effect on various business operations including production, procurement, pricing and sales strategy.
Multi-level claim for Input Tax credit on purchases to simplify Logistics
GST has been introduced to subsume the current indirect tax regime which used to attract several duties and taxes on the sale of vehicles and spares and accessories. The previous taxation regime included:
Central Excise Duty
Additional Excise Duty
CVD and Additional Import Duty
VAT on intra State sales
CST on Interstate sales
Currently all these resulted in cascading effect and increased the product price. However, it is now expected that the product cost will be substantially reduced due to seamless input tax credit (ITC) across the supply chain– from manufacturer to supplier to agent to final buyer; all can claim credit for tax paid on purchases.
Now, the businesses would be able to claim ITC on various elements across the supply chain like lease rentals, IT services and freight charges. The bottlenecks related to logistics and transportation of units from one state to another state would also be wiped off.
The reduced cost will in effect reduce the price and raise the demand and growth in the sector.
The consumer in India is price savvy and companies never fail to use the event to bring SALE and DISCOUNTS. Nevertheless, post-GST rollout, Maruti Suzuki, Tata Motors, Toyota, Nissan and Renault India have also announced the necessary discounts to pass on the GST benefit to the end buyer.
Additional business overheads: Reducing operations cost
With the elimination of CST, companies need not maintain warehouses and C&F agents at multiple state points. The warehousing infrastructure could be clubbed and lower the operating costs in the supply chain.
Further with the inclusion of business overheads such as advertising and business promotion under Input tax credit, the operation cost would be further reduced.
Impact on working Capital: Huge Responsibility on Dealers
This would be a huge concern for the dealers as the supply is taxable in GST. On the date of vehicle transfer, GST liability would be attracted and it would lock the capital.
Another cash lock would be when the auto manufacturers would offer free services/warranties as sales’ benefit to their customers (at the time of sale of vehicles). They would pre-pay GST on the issue date of the coupon while customers would be using the service on a later date.
Impact on Auto Valuation after GST: To what extent can the benefit be passed on to the customer?
The base GST rate has been set at 28% besides a cess (1% to 15%) on vehicles of different categories and sizes. Together both will impact the end prices.
Two-wheelers: Low Impact
The impact of GST is marginal on the two-wheelers sector as the levy is 28 % on engines below 350cc and 31% on engines above 350 cc. Earlier the segment was taxed at 30.2 %. Broadly, the impact on prices for 81% of the market would be unaffected.
Commercial vehicles: High impact on Mini Buses, otherwise negligible effect
The commercial vehicle segment comprises commercial vehicles and three-wheelers. Earlier the segment was paying 12.5 % Excise Duty + 1 % NCCD + 12.5 % VAT and 2 % CST which totaled to overall 30.2 % of tax. Herein three-wheelers were excluded of 1% of NCCD.
After GST, the overall impact on the segment is a slight dip of 2.2 % as the levy is 28%. So, the impact on valuation is again negligible. Similarly, there would be no change in the prices of tractors.
The maximum effect would be visible on a new category being introduced for minibusses ferrying up to 13 passengers. Besides the base rate, the passenger vehicle would invite a 15 % cess on them shooting up the total GST to 43%, which is a major cause of concern.
Passenger Vehicles: Enjoy big rides
Small cars (both petrol and diesel variants; engine below 1200 cc)
The economic car section would attract the base rate of 28% GST along with a cess of 1% and 3% which is smaller than the current 31.4% to 33.5%. In effect, the price of this segment would be neutral or reduced marginally.
Bigger sedans and SUVs (1,500cc or more engine size, Over 4,000 mm length and Over 170mm ground clearance)
In this segment, the buyer will enjoy the price cut. The current taxation rate was 46.6% to 55.3% which was much higher than the new GST rate of 28 % (+15 % cess).
Levy on Green Vehicles: A cause of concern
A 15% cess above the base GST rate of 28% on green vehicles is questionable as it is far above the existing 30.3% rate. While the officials have claimed that smaller hybrid vehicles are ruled out from an additional cess of 15%.
Heavy taxation burden on Demo cars
GST demands a high tax rate on the demo cars. Currently, these vehicles were taxed at 0.5% while they are sold in the used car market after a year or so. With GST, tax rates of 28% and 43% of the sale value would be levied.
All in all, the sentiment all across appears positive so far for the single manufacturer levy. However, it would be too early to pass the judgment. According to Moody’s Investors Service, the Implementation of the GST is expected to lead to higher GDP growth and increased tax revenues for the Indian government. The success would largely depend on the integrated compliance by all the players alike.