The GST Council in its 14th meeting held on May 18, 2017 announced the GST across various categories of goods including automobiles. The rates however will be subject to further vetting, during which the rates may undergo some changes. In line with expectations, the base GST rates for the automobile segment have been set at 28%, which is broadly in line with overall indirect tax rates at present. However, in addition to the base rate, the Government has also proposed to levy a cess of 1% and 3% on small cars with petrol and diesel engines, respectively.
 
Considering GST will subsume infrastructure-cess currently levied on domestic Passenger Vehicle industry, proposed tax rate for small cars will either be price neutral or reduce marginally. Moreover, bigger sedans (engine size > 1,500cc and length >4,000 mm) and SUVs (engine size > 1,500cc and ground clearance > 170mm) will see lower taxation and eventually reduction in vehicle prices, despite 15% cess above the base GST rate of 28%.
 
Contrary to Government’s thrust on promoting greener vehicles, the Hybrid vehicles will also attract a cess of 15% over and above the base GST rate of 28%. This will result in Hybrid vehicles becoming more expensive going forward. q Under GST, the effective taxation is likely to be almost neutral for Commercial Vehicles, Three Wheelers and Two Wheelers (up to 350 cc). However, within the CV space, the mini-bus segment (with carrying capacity of 10-13 passengers) has also been clubbed with bigger vehicles and would attract an additional cess of 15%. We believe this anomaly would most likely be reviewed by the Government.
 
Input Tax Credit and Supply Chain efficiencies added benefits of GST
 
Apart from simplification of taxation structure and a shift towards uniform regime across the country, the automobile sector will also see additional benefits by virtue of input tax credit on various elements of the cost structure. Some of the common example would include - a) Service Tax paid on inputs such as Lease Rentals, IT Services, Freight Charges (on finished products) and b) Lower tax credit on outsourcing activities.
 
The other major benefit of GST is expected to be easing out of various bottlenecks and complexities involved in transportation of goods using road logistics from one state to another. Since CST will be subsumed in GST, companies will no longer be required to have depots/warehouses at multiple locations and also do away with C&F agents. In the automobile industry, while OEMs dispatch vehicles directly from their factories to dealers; in their spare parts business, the sales are routed through depots and C&F agents. With the implementation of GST, companies will be able to consolidate their warehousing infrastructure and benefit from lower costs incurred in supply chain.
 
Passenger Vehicles: Taxation on Bigger Cars and SUVs to reduce; Hybrid vehicles to cost more

Within the automobile sector, the Passenger Vehicle segment will see reduction in overall taxation under GST will subsume infrastructure-cess currently levied on the segment. As shown in exhibit 1 & 2, the extent of reduction in overall taxes will vary across segments and Bigger Cars and SUVs will see the most benefit. q However, contrary to Government’s thrust on promoting greener vehicles, the Hybrid vehicles will also attract a cess of 15% over and above the base GST rate of 28%. This will result in Hybrid vehicles becoming more expensive going forward. However, as clarified by Government officials, the small hybrid vehicles will not attract additional cess of 15%. Comparatively, electrically operated vehicle will be levied GST rate of 12%, whereas Hybrid will attract duty of 43%.
 
Two Wheelers: Largely neutral except for Motorcycles above 350cc segment
 
For the two wheeler segment, the GST rates are likely to be neutral as the segment will attract a tax rate base rate of 28% compared to an existing tax rate of ~30%. However, motorcycles above 350cc segment will attract an additional cess of 3%, leading to an overall tax rate of 31%. In ICRA’s view, the impact will be limited as this segment accounts for miniscule share of (0.4%) of overall industry sales.
 
Commercial Vehicles: Likely to be neutral under GST
 
Likewise for the CV segment as well, the GST rates are likely to be neutral as the segment will attract a tax rate base rate of 28% compared to an existing tax rate of ~30%. However, within the CV space, the mini-bus segment (with carrying capacity of 10-13 passengers) has also been clubbed with bigger vehicles and would attract an additional cess of 15%. We believe this anomaly would most likely be reviewed by the Government.
 
Tractors: Likely to be neutral under GST
 
The tractor industry in India is exempt from paying Excise Duty (on finished vehicles), however, it attracts VAT of 5 to 5.5% and is also not eligible to take credit on input tax paid by vendors on manufacturing of components. As a result, the overall indirect tax on tractor industry works out to be 12-13%.
 
Under GST, the tractor segment will be taxed at 12% with provision to take input tax credit. Accordingly, the impact of GST is likely to be neutral for the tractor industry.

 24 May 2017, 10:12 AM