Impact of GST on auto industry

The government set in motion the process for rolling out the goods and services tax (GST) on Wednesday, August 4, 2016, as the Rajya Sabha voted to approve the constitutional amendment that will help implement the tax, ending months of ambiguity. The GST is essentially an indirect tax reform which aims to remove tax barriers between states and create a single market.

One of the most anticipated tax reforms in the country, GST is expected to replace as many as 17 indirect central and state tax levies and result in a cutback in logistics costs of businesses across all sectors, enhancing ease of doing business.

However, while the bill has been cleared in the current session, it has to be okayed by the state assemblies and meeting the April 1, 2017 deadline for implementation could be challenging, so it might be a few more months after that until the proposed tax is completely rolled out.

Impact on the auto sector

The auto industry is likely to gain from the implementation of the GST since it is expected to reduce logistics costs by removing trade hurdles, paving way for more competitive manufacturing.

The execution of GST will remove the effect of multiplicity of taxes on the cost of goods and services.  Currently, most of car manufactures are located in few of the states in India and by some estimates, 80 percent of these cars are sold to dealers in states outside the state in which they are manufactured. In doing so, a two percent Central Sales Tax (CST) is charged on the cost of car and the same is not creditable. However, with the GST, the two percent CST will be made fully creditable.

Moreover, with the effective tax rate dropping to around 18 percent from up to 27 percent for some segments currently, it will result in lower prices and consecutively, boost demand for automobiles. According to some estimates, the on-road prices of vehicles could go down by up to eight percent.

“I think the automotive sector will be one of the most positively impacted sectors. At present, we have multiple rates of excise duty. With the GST coming in, we are hoping we do not see more than two rates. So that will be also a very positive development as far as our industry is concerned, which we believe is very, very highly taxed.  While we haven't seen the GST rate yet, whatever comes will certainly be lesser than cumulatively what it is today.” according to Vishnu Mathur, director general, Society of Indian Automobile Manufacturers (SIAM).

“We have been hoping that GST would be implemented. It is certainly going to reduce our overall cost structure,” Mathur added.

"The automotive industry wholeheartedly welcomes this tax reform. GST is about unifying the market, widening the tax net and generating efficiencies throughout the value chain. Faster implementation will be critical in determining its success," Kenichi Ayukawa, Managing Director and CEO, Maruti Suzuki India told Autocar India in reply to a query. 

Further clarity of the impact on the auto sector will emerge once the RNR (revenue neutral rate) is decided upon. The RNR is the rate at which there will be no loss in aggregate central and state tax revenue. The same will be decided by a GST council comprising Centre and state representatives.

“We welcome the passage of the forward looking reform which will augur well in the long term for uniform economic progress across the country. In addition to simplifying the tax structure and administration, it will aid ‘Make in India’ becoming more efficient and accelerate movement between producing and consumption locations,” a Tata Motors spokesperson told Autocar India. 

“GST will minimize and simplify the taxation burden on the automotive industry. It  is expected to drive overall consumer demand since the cost for the logistics and supply chain inventory will be curtailed by almost 30-40 per cent, the benefits of which are expected to be passed on to the consumers,” according to Sumit Sawhney, CEO and Managing Director, Renault India.

The passenger vehicle segment in India is around 2.8 million units in annual sales and is touted to reach 5 million units in annual sales by 2020, making the country the fourth-largest market in the world.