Impact of GST on Automobile Dealers Industry
By: – Ravi Kumar Somani
Goods and Services Tax – GST
Dated:- 28-1-2017
The Indian auto industry is one of the largest in the world. The industry accounts for 7.1 per cent of the country's Gross Domestic Product (GDP). Almost 13% of the revenue from central excise is from this sector and claims a size of 4.3% of total exports from India. Despite its contribution to the economy and growth potential, this sector has been combating the hardship of high tax rates for substantially a long period of time now with central excise duty ranging between 12.5% to 30% coupled with introduction of multiple cesses at revenues whims and fancies, most recent being infrastructure cess.
Apart from the high tax rates, industry has seen extensive litigations on VAT v/s Service Tax tussle, valuation issues in case of PDI charges, warranties, taxation on handling charges and many more. Thus, introduction of GST shall be a breather for this sec
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sale of vehicles. Further, in case of inter-state sale of the vehicles, they will be collecting and paying IGST (i.e. Integrated GST, which is nothing but the summation of CGST + SGST). Impact of GST on various aspects is as examined below:
1) Impact on Credits:
Currently, automobile dealers are not able to avail CENVAT credit on the following indirect taxes paid by them:
* CST Paid on purchase of vehicle, spares, consumables, accessories and assets;
* Excise Duty paid on purchase of vehicles, spares, consumables and accessories;
* NCCD, Auto Cess and Infrastructure Cess paid on purchase of vehicles;
* CVD paid on any imported Spares, accessories and consumables;
* SBC paid on input services;
* Reversal of proportionate CENVAT credit of service tax due to trading activity – Showroom Rent, Advertisement expenses etc.
In GST Regime, all the above duties/ taxes will get subsumed, therefore dealers should be able to avail the input tax credit of all its procurements of go
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ize Cars
7,50,000
18%
–
1,35,000
7,50,000
2,22,000
Luxury Cars
20,00,000
28%
2%
6,00,000
20,00,000
6,82,000
SUVs
16,00,000
28%
2%
4,80,000
16,00,000
5,93,000
* Since IGST and cesses shall be fully available as credit in the GST regime, therefore they will not form part of purchase cost and can be set-off from output GST payable on sale of the vehicle.
* Procurements are assumed to be in the course of Inter-state. GST rates have been assumed to be at such levels based on the various news reports and the reports issued by various committees formed by the Ministry of Finance.
As noted above, reduction in procurement cost is substantial as cascading of taxes was just adding to the cost in this sector.
3) Impact on the Sale Price:
Since, the procurement cost reduces in GST and if the benefit of the same is fully passed on to the consumer, then it leads to reduction in sale price of the vehicles as tabulated below:
Type of Vehicle
Sale Price Current Regime
Sa
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lers in the GST regime:
* Vehicle Transfers: transfer of vehicle/ spares to other premises will be liable for GST if the transfer is in the course of inter-state trade. Further, if there are separate dealerships of a dealer and separate GST registration number is obtained for each such dealership, then transfer of any goods/ services between such dealerships will also be liable for GST. This shall block the working capital as the taxes needs to be paid from own funds and collection of taxes will be at a later date only when such goods/ services are eventually sold.
Free Service Coupon vouchers: These coupons will be issued at the time of sale of the vehicle. As per the time of supply rule, GST on such coupons needs to be paid immediately on the date of issue of such vouchers. As per the policy of some manufacturers, the amounts in respect of such coupons will be redeemed to the dealers only once the customer brings the vehicle for repair to the workshop. Therefore, dealers would ha
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ankers/ Insurers: As details of the commission will be provided by bankers/ insurers at a later dates with constant changes involved. Therefore, generally dealers pay service tax on such receipts only upon receipt of commission;
* Income from manufacturer: Various commissions, incentives, reimbursements, warranty receipts etc. are received from manufacturer. Dealer dont pay taxes on these incomes on accrual basis as the same may or may not get approved by the manufacturer at a later date. Therefore, currently service tax is paid on receipt basis only when the amount is credited by the manufacturer and is reflected in the manufacturer's statement.
However, the luxury of paying taxes on receipt basis will not be accepted in the GST regime as everything will be system driven. Therefore, dealers will have to either get its system corrected with the bankers and manufacturers immediately to ensure smooth transition into the GST regime or else it would have to take the brunt of taxes on i
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cts various amounts from customers which are mere reimbursements and are paid back as it is to someone else. In other words, these amounts are collected merely as a pure agent such as:
* Insurance of the vehicle;
* Temporary/ Permanent Registration charges,
* High Security Number Plate Charges;
* Credit Card Swiping Charges etc.
Currently, Service Tax is not paid on such values, if collected as a pure agent. Ideally, these receipts must also be kept out of the GST net, or else it would create further valuation tussle in the GST regime.
Road Tax/ Life Tax: Currently, service tax or VAT is not paid on the Road Tax element. However, in the GST regime, value for the purpose of paying GST must also include Road Tax. Section 15 of the revised model law clearly states that no taxes shall be allowed as reduction from the value except CGST, SGST and IGST. Therefore, duplication of taxes to this extent shall continue, if not timely represented by the associations. Road tax rates are
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as 'Extended warranty' or 'Road side assistance', Service Tax is being paid only on commission element. However, in GST regime, such tax treatment may not be acceptable and dealers will have to pay GST initially on the entire value of the warranty receipts and the amounts charged by the manufacturer can later be taken as a credit. Adoption of this would require tremendous efforts.
6) Reduced current litigations:
Currently, the sector is facing disputes on the following areas:
* Valuation in Servicing of vehicle: Complexity in bifurcation of the material and labour component in the servicing of vehicle has led to multiple disputes as both the service tax and sale tax authorities demand taxes on a higher component.
* Handling Charges: Whether it is liable for VAT or Service Tax has led to demand of taxes from both the authorities and thereby disputes.
* Registration charges: Disputes were noted on applicability of service tax on various charges that are merely collected as pure
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ascertain the value of stock as on the appointed day and based on the availability of the invoice, credit can be availed. Further, even if proper excise invoice is not available with the dealer still a percentage as prescribed can be taken as credit to transit its excise credit in the GST regime.
* VAT/ SAD: Similarly, if a dealer is not availing the credit of VAT/SAD currently due to restriction in the state VAT law, then credit can be availed based on the ascertainment of stock as on appointed day. However, if the credit of VAT is being currently availed then the same needs to be properly reflected in the last VAT return to transfer such credits to the GST regime.
* Credit of CST: The same cannot be availed based on the stock availability as on the appointed day.
* Entry Tax: Credit of same can be availed subject to possession of appropriate documents for the same in states where such set off is permissible.
8) Impact due to Anti-Profiteering Measures:
Since a dealer will
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7 Returns in one financial year for each registration apart from ISD returns, if any. Further, returns filed will be matched online with the support of the IT infrastructure with the returns of the vendors/ customers. In case taxes are not paid by the vendors or if the returns are not filed by the vendors, then the credit of such taxes is denied to the customers. Therefore, timely payment of taxes, filing of returns needs to be ensured in the GST regime.
* Accounting: Coordination/ communication, flow of documents from various branches to accounts department should be before 10th of the subsequent month. Therefore, accounting function needs to be more robust, live and automatic. As far as possible, a dealer must map its accounting framework with other processes in an ERP environment and therefore finance & accounts department needs to be better structured to cope up with the needs of the GST regime.
* IT Infrastructure: In GST regime, businesses have to move from the manual environ
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Agreements re-alignment to suit the needs of GST of breaking up into the multiple supplies, composite supplies or missing the supplies;
* Business re-structuring/ Transaction re-structuring needs to be assessed and implemented;
* Understanding the impact on various business departments including procurement, sales & Marketing, finance & Accounts, IT, Admin & HR etc. and re-structuring the same to suit the needs of the GST;
* Optimizing the transitional credits, future credits.
* Assessing the capacity building to meet the needs of the GST;
* Strategizing the right pricing to create right balance between margins and volumes;
* Ensure original entries are verified, keep evidences of tax payments etc;
* Representing through various bodies/ associations on various adverse provisions of the GST law;
* Conducting in-house training programs for learning & development of staff to ensure smooth implementation into the new regime.
* CA Madhukar N Hiregange
* CA Ravi Kumar So
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