The automobile industry in India is one of the largest automotive markets in the world. The industry contributes around 7 % of the country’s Gross Domestic Product (GDP). In past, the Government of India has taken various measures and initiatives to promote and to ensure the growth potential in this sector. It is one of the main drivers of ‘Make in India’ initiative.
Currently, there are host of indirect taxes applicable on the products and various allied services rendered by this industry. Like, Excise on manufacturing on cars and spare parts, VAT on Sale and service Tax on rendering associated services like servicing and repair work. GST, a comprehensive indirect tax on goods and services, is all set to subsume host of indirect taxes, it becomes extremely important for businesses in this sector to understand the impact of GST on various operations and process.
The impact of GST on the Indian automobile market is going to be manifold. Let us have close look at impact of GST on Automobile Sector.
Impact of Input Tax credit :
Under Current Indirect tax regime, on sale of vehicles, spares and accessories, the following duties and taxes are applicable:
• Central Excise Duty and Additional Excise Duty
• Infrastructure Cess : On sale of Vehicle
• CVD and Additional Import Duty : Import of spares and accessories
• VAT/CST : VAT on intra State sales and CST on Interstate sales
Today, a dealer is not allowed to claim input tax credit of all the duties and taxes listed above except VAT. Also, for a manufacturer, CST and other State levies like entry tax, paid on procuring the raw materials is not allowed as input tax credit. Thus, the business are forced to add this as a product cost and this in turn leads to cascading effect and increase in the product price.
GST allows seamless availability of input tax credit across supply chain- Right from Manufacturer till it reaches final consumer and across the State borders. This eliminates the cascading effect of taxes in the supply chain and as a result, the product will be cost effective. This reduction of product cost will lead to reduced price, increased demand and therefore, contribute to the growth of the business in this sector.
Bottom line Impact :
Under Current regime, taxes paid by an automobile manufacturer or dealer on business overhead like advertising services, business promotion etc. are not allowed as Input tax credit. Under GST, with the introduction of business concept “Used or intended to be used in the course or furtherance of business” the business can claim input tax credit on business overheads. This will help the business in reducing the cost of operation and increasing the profitability.
Impact of working Capital
Supply being a taxable event in GST, the vehicle transfers between the branches will be taxable. This implies, on the date of vehicle transfer, GST needs to be paid. Through the business are fully eligible for tax credit, for a period between vehicle transfer and the sale date, the funds will be locked.
In this sector, it is very common to receive the vehicle booking advance. Today, dealer is not required to pay tax on the date of receipt of advance. However, in GST, on the date of receipt of advance, dealer is required to pay GST. The taxability of advance will have a dent on their cash outflow.
Impact on Valuation :
Today, on sale of vehicle, a dealer charges for various ancillary services which are bundled with the vehicle like additional accessories, registration, extended warranty, insurance etc. Under GST, the concept of bundling of two or more goods or service or a combination is referred as mixed supply and Composite supply. In determining the rate of tax applicable on mixed supply and composite supply, different principles are applied. Therefore, it becomes, very important for dealers offering bundle of services or goods along will vehicle to understand the implications of mixed supply and composite supply. And accordingly take suitable measure such that benefit is passed on the customer.
Secondly, a manufacture provides discounts to dealer based on the targets, Year-End sale, and special occasion discounts etc. Generally, these are post supply discounts and under GST, these discounts will be allowed as deduction from transaction value only if discounts can be linked to specific invoice(s). Hence, the business need to re-look the discount policy to avoid paying taxes.
GST is expected to be implemented in July, 2017. Businesses needs to understand the implication of GST on various business operations like procurement, pricing, sales strategy etc. and ensure that the suitable measures are in place, which is crucial for smooth transition to GST.
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