The taxation structure of India has always been very complicated with a series of indirect taxes before GST came to effect. Subsuming all the indirect taxes into one, GST has completely reformed the way taxes work in individual states.
This article focuses on the impact of GST, particularly on the automobile sector, its business transactions and undertakings.
Understanding GST Impact on Automobile Sector
Like every new tax regimen, there have been many pros and cons of gst. However, the impact of GST on the automobile sector specifically brought many positives as automobiles manufacturers are required to pay reduced taxes and pass the same benefit on the consumers.
Replacing a set of multiple taxes such as road tax, sector tax, VAT, sales tax, registration duty, and motor vehicle tax, GST on automobile services is the single tax that needs to be paid by the manufacturers.
The automobile industry in India is a large business that produces a massive number of cars and bikes every year. GST implementation subsumed most of the indirect taxes that existed in the sector.
Two main taxes charged to the end consumer on cars and bikes before GST was excise and VAT (with an average combined rate of 26.50- 44%). GST brought unified tax rates of 18% and 28% which is lower than earlier tax slab, putting much lesser tax burden on the end consumer.
GST Impact on Various Vehicle Categories
Automobiles have been kept under the 28% tax bracket under GST. This changed tax structure has different implications for various types of vehicles available in the market.
While for the commercial vehicles, it means a marginal change in the tax, for small vehicles and SUVs, it leads to a sizeable cost reduction. This change has a direct benefit for the middle-class sector as the reduced impact of taxation will be directly passed on to the end-user through lowered prices of vehicles.
The automobile sector mainly comprises of commercial (three-wheelers, minibuses) and non-commercial vehicles (SUVs, luxury cars, budgeted cars, etc.). Let’s discuss the tax slabs and impact of GST on these categories-
Impact of GST on commercial vehicles
The commercial vehicle segment is primarily used for the execution of business services and has been significantly affected by GST. Earlier, the tax structure for the segment was 12.5% Excise Duty + 12.5% VAT and 2 % CST and several other taxes which totalled to overall around 30-33% of tax.
After the GST implementation, the overall impact on the segment saw a slight dip as the tax levied is now reduced to 28%. So, the effect in the valuation is relatively low. However, the prices of tractors remain unchanged as declared by GSTN Council (Goods and Services Tax Network) to provide relief to the farming/agricultural sector.
The maximum effect of GST in this category is visible on minibuses as besides the base rate, this vehicle segment demands a 15% cess on them, which increases the total GST rate to 43%.
Impact on non-commercial vehicles
GST has had a relatively low impact on non-commercial vehicles. Here is the break up of the GST rates on various category of vehicles under this segment-
- a) Small-Budget Cars(both petrol and diesel costing under 10 lakh INR)- the base rate of 28% GST along with a cess of 1% and 3% which is less than the pre-GST taxes of 30-33%.
- b) Luxury Vehicles/SUVs– cess rate of 25%, escalating the total GST tax rate to 53%
- c) Hybrid Cars– GST tax rate of 43% (28%, with 15% cess), which is higher than the tax on smaller cars. In the case of pure electric vehicles, the GST rate is only 12%.
Impact of GST on valuation
Before GST, different commissions received from automobile manufacturers such as roadside assistance, service tax and extended warranty was paid only on the commission component.
Post the implementation of GST, such tax treatment has been changed, and dealers are required to pay GST initially on the entire value of the warranty receipts. Later, the amounts charged by the manufacturer can be taken as a credit.
Reduction in Operational Cost
Before gst verification came into effect, it was CST or central state tax that was applied on the interstate sale of automobiles. With GST implementation, automobile companies are no longer required to maintain different warehouses at multiple locations.
They enjoy the freedom to combine various warehouses and avail the benefit of low operating cost. Additionally, there is a further decrease in the costs as the taxes paid on various overhead expenses, including promotions and advertising come under input credit tax.
Lower Cost of Transporting Goods
There has been a significant reduction in the cost of transporting goods due to GST tax on automobiles. This is because transportation anywhere in India doesn’t pass through check posts or varied taxes.
Benefits of GST for the Automobile Sector
Below are some of the benefits for automobile industry due to the implementation of GST
- With the GST rate being the same across the country, there is no differentiation of tax cost for the consumer when procuring the vehicles from any another state.
- Reduced vehicle prices lead to rising of fuel demand in the market thus boosting overall manufacturing growth.
- GST eliminates things such as multiple levels of taxation, cascading taxes and elaborate tax compliance obligations through the implementation of a simplified and fully-automated tax mechanism and also ensures better compliance.
- The new taxation structure also reduces the incidences of tax evasion which mainly occur due to consumers buying vehicles from states other than their home state.
- GST also reduces the cost of manufacturing due to the subsuming of various taxes levied in the earlier tax regimen.
Overall, the impact of GST on the automobile industry is undoubtedly positive due to reduction on rates. Further, implementation of GST has also enhanced the manufacturing of automobiles by reducing taxes to one unified structure and simplifying the complicated taxation system.
Since the taxes are charged on supply and consumption state instead of the origin state, it gives a boost to the growth rate of the automobile industry.