Subrata Ray
The recently finalised Goods and Services Taxes (GST) for automobiles are largely in line with expectations and broadly conform to the overall indirect tax rates currently in vogue. While the base GST rates for the automobile segment have been set at 28%, in addition to the base rate, the Government has also proposed to levy a cess on vehicles of different categories and sizes, the impact of which on the end prices of vehicles will vary accordingly.
On small cars with petrol and diesel engines respectively, in addition to the base GST rate of 28%, a cess of 1% and 3% has been levied (existing rate 31.4% to 33.5%). Considering GST will subsume infrastructure-cess currently levied on domestic Passenger Vehicle industry, the proposed tax rate for small cars will either be price neutral or reduce marginally. The bigger sedans (engine size > 1,500cc and length >4,000 mm) and SUVs (engine size > 1,500cc and ground clearance > 170mm) will however see lower taxation (existing rate 46.6% to 55.3%) and eventually reduction in vehicle prices, despite 15% cess above the base GST rate of 28%. This segment will see the most benefit.
As for greener vehicles, despite the Government’s thrust on promoting them, the cess has been imposed at 15% above the base GST rate of 28%. This will increase the cost going forward (existing rate 30.3%). However within this segment, based on clarifications provided by officials, the small hybrid vehicles will not attract additional cess of 15%. Comparatively, electrically operated vehicle will be levied GST rate of 12%.
As for commercial vehicles (existing rate 30.2%), three wheelers (existing rate 29.1% and two wheelers (upto 350 cc), the impact of GST will largely be neutral. However the mini-bus segment will attract a cess of 15% in addition to the base GST rate of 28%. The clubbing of mini-buses seems to be an anomaly most likely to be reviewed later by the Government.
The GST rates for the two wheeler segment, are likely to be neutral as the segment will attract a tax rate base rate of 28% (existing tax 30%). However, motorcycles above 350cc segment will attract an additional cess of 3%, leading to an overall tax rate of 31%. As this segment accounts for miniscule share of (0.4%) of overall industry sales. the impact will be limited
While tractors in India are exempt from paying excise duty (on finished vehicles), they attracts VAT of 5% to 5.5% and are also not eligible to claim 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 (ITC). The impact of GST is likely to be neutral for the tractor industry.
The new simplified GST tax structure will benefit the automobile sector in many ways. This shift towards uniform regime will enable automobile sector to claim ITC on various elements of the cost structure such as service tax paid on inputs such as lease rentals, IT services, freight charges on finished products and lower tax credit on outsourcing activities. Also bottlenecks and complexities related to transportation of goods using road logistics from one state to another will be eased out.
Since CST will be subsumed in GST, companies will no longer be required to have depots/warehouses and C&F agents at multiple locations. Companies will be able to consolidate their warehousing infrastructure and benefit from lower costs incurred in supply chain.
(The author is the Group Head, Corporate Sector Ratings at ICRA)
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