The automobile industry in India is a vast business producing a large number of cars annually, fueled mostly by the huge population of the country. Under the current tax system, there are several taxes applicable on this sector like excise, VAT, sales tax, road tax, motor vehicle tax, registration duty which will be subsumed by GST. Though it is too early to provide an in-depth analysis of cost per product post GST implementation, as some ambiguity still remains due to incentives/exemptions provided by different states to the manufacturers/dealers for manufacturing car/bus/bike, our experts have taken the information available, and predicted the future of this industry once GST goes live in July.
Current Tax Laws on Automobiles
Table showing the different types and rate of taxes levied on the passenger vehicles/SUV.
|Segment||Excise||*Nccd +auto cess||VAT||*Road
|*Motor vehicle tax||Total||CGST||SGST||TOTAL||Difference|
|Small Cars <1200cc||12.50%||1.1%||14%||State based||State based||28%(approx)||9%||9%||18%||10%|
|Mid-SizeCars from 1200cc to 1500cc||24%||1.1%||14%||State based||State based||39%||9%||9%||18%||21%|
|Luxury Cars>1500cc||27%||1.1%||14%||State based||State based||42%||14%||14%||28%||14%|
|SUV’s >1500cc, >170mm ground clearance||30%||1.1%||14%||State based||State based||45%||14%||14%||28%||17%|
Presently, sales of used cars attract VAT, and in some states, a composite rate and Excise/VAT are not applicable on advance received for supply of goods. Many states provide the Original Equipment Manufacturers (OEMs)/component makers with different investment-linked incentive schemes. The two main components of this scheme are subsidies and interest-free loans allied with VAT/CST payable on sale.
Sale of goods/service without any form of consideration is currently exempted from being taxed under VAT and Service tax. Importers and dealers currently are ineligible for the CVD and excise duty paid by OEMs (Original Equipment Manufacturer).When goods are transferred from the factory, excise duty has to be paid but no VAT/CST is applicable under current tax laws. These vehicles are exempted from the Nccd/auto cess: electrically operated vehicles, three-wheeled vehicles, hydrogen vehicles based on fuel cell technology, vehicles used solely as taxis, the ones used by physically handicapped persons, hospital ambulances.
Impact of GST on the Automobile Industry
The two taxes charged to the end consumer currently are excise and VAT, with an average combined rate of 26.50 to 44% which is higher than the expected rates of 18 and 28% under GST. Therefore, there will be less burden of tax on the end consumer under GST.
There is good news for the importers/dealers as they would be able to claim the GST paid on goods imported/sold whereas currently, they are ineligible to claim the excise duty and VAT paid. Excise paid on stock transfer will be covered by IGST under the GST law. Advance received for supply of goods will also be taxed under GST. GST would help the manufacturers in procuring auto parts at a cheaper cost due to an improved supply chain mechanism under GST.
The final GST rates have been announced for the different kind of automobiles. As expected the automobiles are kept under the 28% bracket and a list of cess to be levied on a different kind of automobile has also been declared by the Indian government. Cess has been levied on different kind of automobiles ranging from 1 to 15%. We have created an infographic for an understanding of different cess rates applied on different kind of automobiles.
GST will be beneficial for the people in the market for small family cars like Alto, Santro, Nano, Datsun go as a minimum cess of 1% has been charged over and above the GST rate of 28%. Motorcycles which have an engine of greater than 350CC like Enfield 500CC or Harley Davidson etc would be charged GST at the rate of 28% and an additional 3% cess would be levied. It is difficult to understand the placement of yachts, aircraft, personal jets under the 3% cess bracket along with the small cars having engine >1200CC and <1500CC instead of the 15% cess.
Currently, there are a lot of free services/warranties offered by the car manufacturers due to the competitive nature of the industry. These free goods/services are not taxed under current tax laws. Under GST, the free services/ warranties would also be eligible for taxation.
Implementation of GST would reduce the cost of manufacturing of cars due to the subsuming of different taxes levied currently. Under GST, the taxes would be charged on consumption state rather than the origin state, which would give a boost to the growth rate of the automobile industry.