Multiple taxation laws, numerous interpretations and the discretion at the disposal of the authorities have caused multiple roadblocks on the way to ensuring a smooth & easy climate for trade & commerce. Stakeholders have been known to refer to the business climate in the country as multiple entities bound together by a common currency. The much-delayed Goods & Service Tax (GST) which has faced countless hurdles from state governments, recently got green-flagged in the Rajya Sabha, thereby paving the decks for a pan-national single market economy.
The impact of GST on the Indian car market is going to be manifold, as it cuts through hurdles across critical functional areas such as Sales & Marketing, Logistics, and Taxation, among others. Apart from auto manufacturers themselves, it is their support system that is the Tier 1, 2 & 3 component vendors who shall benefit significantly in the form of a more conducive trading environment.
Currently there are multiple direct & indirect taxes, including Excise & VAT (Value Added Taxes) being levied at various stages of the manufacturing & sales process in the case of automobiles. Moreover, each state has its own taxation levels & the rules governing them. A uniform goods & service tax on automobiles would, in principle, mean an end to the wide variance in prices across the length & breadth of the country for any given automobile. Below is the Example of Pre – GST & Post – GST Infographic
Impact Of GST
- GST is expected to be positive overall for the automobile industry including car manufacturers as well as component manufacturers (although passenger vehicle segment is going to attract the highest slab of GST), as it removes the cascading effect of taxes
- Interstate sales today attract a tax (CST), which is at 2%. Many India based car and two wheeler manufacturers are setting up multiple plants across states, with plenty of components and finished goods moving across borders, and so they have to pay multitude of taxes in the process. Introduction of GST would straightaway scrap that, as there is no origin tax in GST (IGST is there, but it can be credited against sale to another state)
- Other indirect taxes like excise duty on cars (8-27%),Entry taxes like Octroi (4-5%), Infrastructure cess on cars (ranging from 1-4%) and VAT, will be eliminated. These taxes determine the prices of the cars as well as auto parts. A central tax structure will do away with these taxes, and may effectively bring the prices down
- Passenger car vehicles will attract the highest slab of 28%. Goods which currently attract low rate of duty like small cars (excise duty of 8 per cent), the impact of GST will bring about a price hike.
- For luxury cars, GST+Cess will amount to about 40%. But the reduction of a slew of indirect taxes may mean that luxury cars may become slightly cheaper (by about 1-2%)
- Auto component manufacturers will benefit from scrapping of indirect taxes like excise duties (which are applied on goods manufactured within India). Current structure allows double taxation, where excise duty is first levied, which inflates the MRP, and then VAT/Sales Tax is levied as a percentage of MRP.
- Many products which are used widely in the auto industry (e.g. ores and concentrates – Copper, aluminium, Titanium etc, Iron and Steel, plastic and rubber articles, packaging materials) are under the purview of Excise department, and hence are taxed at the Central as well as the State level (Excise and VAT respectively). Introduction of GST means a central tax structure and would possibly reduce the input costs for manufacturing and thus drive down the prices.