After a long debate, the Union Finance Minister has finally achieved what seemed to be impossible, that is to pass the 122nd Constitutional Amendment Bill. This bill will further work on the implementation of GST in India.
So before we move further we need to know what the GST bill is. In simple words, it is a tax that is a conclusion of all the taxes we pay already like VAT and excise duties into one singular tax, the GST.
While a lot has to be done by the Central and State Governments to turn GST into a reality, which is hoped to be implemented by 1 April 2017, it has raised hopes to the Indian companies.
Generally, GST is expected to result in a reduction in the cost of business by removing the flowing effect of Central and State taxes, and also will allow a complete exchange of taxes paid on goods and services against each other.
The Automobile Industry will definitely be affected from GST, so here are some positive effects:
- Currently, the excise duty for vehicles is divided into four slabs, in which the smallest tax rate is for the small cars. With the implementation GST, taxes imposed by the govt like excise duty and state levels taxes like sales tax, road and registration tax would all be incorporated into one.
- Also the vehicle prices are expected to be affordable and will likely create a lot of demand.
- The trucks that carry new bikes and cars from the factory to the dealership have to go through numerous checkpoints in the route to pay taxes to the states. The GST will bring this to only one tax to be paid, which will make goods delivery easier and faster.
- Presently on small cars, a total tax of around 28 per cent is charged which includes VAT and excise duty while on the mid-size cars, the tax is around 39 per cent. If the 18 per cent GST is applied, then taxes on small cars will reduce by 10 per cent and taxes on mid-size cars is expected to reduce by almost 21 per cent.
- Overall cost of vehicle manufacturing will also be reduced through the impact of Tax cascading. All taxes on input paid will be offset with the output liability of GST.
With positives there some challenges that the industry might face:
- The job work process is the pillar for automobile industry and the GST law treats ‘job work’ as a service and pursues to maintain existing excise procedures for the job work dealings. This is the non-taxability of job work transaction and giving credits to the principal for supplies to job worker, which is still a challenge for the industry.
- Automobile industry develops tools/ moulds for vendors to support manufacturer in the automobiles sector. Usually, the ownership of such tools is transferred to the OEMs (original equipment manufacturer), and the cost is also recuperated from OEMs. However, the tools are located in the vendor’s factory for manufacture of parts. Under the GST law, ‘capital goods’ covers only those goods which are used at the place of business of supply of goods, which might affect the sector.
- Presently, under the excise law, duty is paid at the time of removal of the vehicles manufactured and VAT is paid at the time of sale of vehicles. After the Model GST law is started the time of supply of goods shall be at the earliest and in the current law the receipt of advance towards supply of goods is not a taxable event, both under Central Excise and VAT law.
- The investments by automobile companies are important and have multiplier effect on the State’s economy but the current GST is not talking about it. Also majority of the automobile manufacturers enjoy special benefits from the State Government in the form of State Investment Promotion Subsidies (IPS), which is given in the form of refund of VAT/ CST paid, or as a loan.