GST India: Impact on Automobile Sector

Tax Rate:

The direct and visible impact would be on the prices of automobiles as under the prevailing indirect tax regime both Central Excise (12.5 to 30% based on length) and state VAT (12.5 to 15%) are applicable on vehicle sales that is a cumulative rate of 24 to 45%. Under GST the expected rates are in the range of 17-18%. On the other hand Tractors which are exempted from Excise and only VAT at 4-5% is applicable could see jump in price due to GST unless they are specifically exempted. However tractor manufacturers would benefit as currently they pay Excise on inputs in the range of 12% which gets accumulated as it cannot be set-off against output which is exempt. Under GST they would be not only able to take credit but also claim refunds if inverted duty structure were to continue.

Business Process Change:

Most auto component manufacturers are located close to OEMs to avail VAT input credit benefits as in the case of interstate sales, credit on CST is not available. Hence manufacturers may do a rethink on opening units in all big states and rather setup few centralized factories and achieve economies of scale. In the distribution chain as well, more than 90% of the sales will be outside the state of manufacture by sale to dealers or by stock transfer to company owned warehouses. Dealers cannot claim input credit on CST paid and this gets transferred to end customers, adding to the price.

 Although, stock transfer does not attract tax, many states place restrictions on claiming input on such goods. Under GST any form of supply (including branch transfers) would attract tax. As there is no sale during branch transfer, rules for determining the ‘value of transaction’ need to be adopted and adhered to. Also GST liability would arise immediately after branch transfer and hence GST payment needs to be made although actual sale would happen quite later. For goods in transit on the date of transition to GST, the tax implications need to be assessed.

With elimination of area wise tax exemptions (Tax holidays / loans / subsidies etc.) prevalent currently, automobile manufacturers will have to rethink their strategy on setting up hubs in tax free zones.

For 100% EOU, claiming of refunds would be automated and regular in GST regime. The treatment of existing export incentives, incentives/subsidies on electric vehicles need clarity. 

(The views expressed in this article are strictly of the author in personal capacity)