ABSTRACT:

The Automobile industry in India is one of the most successful

manufacturing space from past liberalization.

The industry has potential to grow to become a major economic

contributor. The Government of India has also recognized the
importance of Automobile industry holds in the Indian economy and
hence is currently working on Automotive Mission Plan 2026 to set
targets for the industry for the year 2026. The Government of India has
planned to implement of GST to the manufacturing sector in India. The
objective of this study is the impact of GST on Automobile sector in
India.
CHAPTER:-1

INTRODUCTION

Automobile sector in India is growing fast and the growth pattern

seems to have a clear correlation with the reforms related policies those
influenced both domestic demand pattern as well as trade. India is global
major in the two wheeler industry producing motor cycles, scooters and
mopeds principally of engine capacities below 200cc. The two wheeler
industry in India has grown at a compounded annual growth rate of more
than 15% during the last five years and Indian two wheelers comply
with some of the most stringent emission and fuel efficiency standards
maintained world wide. In India two wheelers is the second largest
producer in the world and the world‟s number one producer is located in
India. India is the largest tractor manufacturer, the fifth largest
commercial vehicle manufacturer and the thirteenth largest producer of
passenger cars in the world.

The Auto industry currently employs more than 30 million people

both directly and indirectly. The auto industry is a key employment
generator in the OEM factory that manufacturers the vehicles, in the
inbound auto component and logistics industry that makes and delivers
components & systems and the out bound logistics and dealer network
that sells, maintains and distributes the cars. Every vehicle produced,
generates secondary and tertiary employment. The industry generates
employment of 13 persons for each truck, 6 persons for each car and
four persons for each three wheeler and one person for two wheelers. It
is important to appreciate the sector‟s multiplier effect on economic
activity. If the industry produces as per its potential, it could generate
employment of over 35 million people by 2020.

ABOUT THE GST

The GST as the biggest taxation reform and is basically a proposed

tax reform at the moment. This is indirect tax much like the VAT,
Service tax, entertainment tax, etc. and this would be levied by the state
and center in the form of State GST and Centre GST on the
manufacture, sale and consumption of almost all goods and services all
across India. 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 manufacturers are
located in few of the states in India and by some estimates, 80% of these
cars are sold to dealers in states outside the state in which they are
manufactured. Moreover, with the effective tax rate dropping to around
18% from up 27% fro some segments currently, it will result in lower
prices and consecutively, boost the demand for automobiles with respect
of taxation and duties, cars have been classified into four categories (i)
Small cars with petrol engine capacity below 1200cc and under four
meters in length, (ii) Mid size cars with petrol engine below 1200cc ,
(iii) Diesel engine below 1500cc , (iv) Luxury cars with engine capacity
of 1500cc and above, (v) SUVs with engine capacity above 1500cc, 170
mm of ground clearance and longer than four meters. On small cars, a
total tax of around 28% is levied currently which includes VAT and
excise duty while for Mid size cars, it‟s around 39% once GST gets
implemented, the total taxes levied on cars is likely to be reduced.

The industry requires the Government to support by providing it an

atmosphere that facilitates growth. While the auto industry is focused on
generating volumes in the different segments to garner growth, it is in
the interest of the Government to continue with the lower excise rates as
this will help increase volumes and garner additional tax revenue. High
tax rates and consequent high prices of vehicles have a harmful effect of
lowering volumes, lowering gross tax collections and ultimately
lowering growth in the auto sector.

The Government should facilitate a conducive environment for

growth of the auto industry by defining favorable long-term policy for
investment. Due to the unfavorable policy environment in the country
where tax rates on vehicles are getting changed every year and
Government is negotiating FTAs where custom duties are likely to come
down, many international companies that had planned to enter the
market have stalled the plan and are now considering other emerging
markets, such as China and Brazil.

The industry has potential to grow to become a major economic

contributor. The Government also recognizes the importance the
automobile industry holds in the Indian economy and hence is currently
working on Automotive Mission Plan 2026 to set targets for the industry
for the year 2026 and to suggest interventions that would be critical for
growth of the industry. The industries identified by the Prime Minister
for “Make in India” also include the automobile and auto component
industry. The Ministry of Finance has laid down the roadmap for
implementing Goods & Services Tax (GST) from April 1, 2010 and the
Empowered Group of State Finance Ministers on Value-Added Tax
(VAT) has accepted the report of the Joint Working Group which
suggests a dual GST structure (a central GST and a state GST).

IMPACT OF THE GST ON AUTOMOBILE SECTOR

The Goods and Service Tax is a single rate tax levied on the
manufacture, sale and consumption of goods as well as services at a
national level. In this system the GST is implemented only on the value
added at every stage of production. This will ensure there is no
cascading effect of taxes (tax on tax paid) on inputs that are used in
manufacturing goods. With the GST in place, the prices of goods are
expected to fall, and in the long term we can expect the dealers to pass
on these benefits to the end consumer as well. The Automobile industry
has seen significant disputes under central excise valuation like, sale
below the cost for market penetration, inclusion of State Industrial
Promotion subsidies retained by the manufacture, deductibility of past
sale discounts from value under excise, valuation of demo cars treatment
of PDI charges and other dealer reimbursement advertisement charges
recovered from dealers etc., and sales though marketing companies and
mutuality of interest. The model GST law continues with the concept of
transaction value which is a welcome measure, however the powers for
rejection of the transaction value are very wide, and could lead to
significant valuation disputes.

The GST is working towards a more viable approach when it

comes to tax, which is applicable in the manufacturing process. The tax
under the new regime which the manufacturer has already levied in the
manufacturing process in deducted when the final product created by the
manufacturer is produced in the market. Hence, the tax on products in
overall reduced as the tax otherwise charges on the final product does
not include the pre charged one. The same process is followed on the
level of the wholesaler who sets off the tax when he purchases the good
from the manufacturer and releases them in the market. The product
passes from the wholesaler to the retailer the retailer after adding value
to the product again sets off the tax when releasing the goods finally in
the market. In this chain of passing the goods from one to another, the
tax sets off at every level, releasing a bit of pressure on all the people on
the respective stages. Hence, when the final product is released the
overall value of the good when taxed has a marginal variation in favor of
the consumer as to re-existing rate of taxes. The double tax burden is
being eliminated from this region as taxes that may have been charged
and again charged on the tax that was already paid has been done away
with the section, though has variations as per type of vehicle depending
on the size and emissions by the same. Moreover the overall compliance
burden is expected to decrease and bring lots more efficiency in
operations of the indirect tax prospective the whole country will be
treated as one market and will add to operational efficiencies.

The GST will be positive for the automotive sector, primarily

because of the efficiency and the removal of cascading that is expected
with GST, example a car is manufactured in a particular state and
generally 80 percent of these cars are sold to states outside the state of
manufactures to dealers outside the state. So today, to straight away give
you an example, the two percent central sales tax (CST) that they pay
will not be there tomorrow because hopefully origin tax is not there.
Even the two percent CST will be an integrated GST (IGST) which will
be fully creditable by the dealer when he sells the car in the other state,
and even from a procurement point of the view, if there is interstate
procurement we suffer today at two percent CST which is a cost to the
manufacturer, that also will not happen because those interstate
procurements will have an IGST in it which is again available as a full
credit to the manufacturer if the credit rules are simple and easy. The
second efficiency could be also on the input side, a bigger, more easy
credit mechanism so that all the taxes on the input side, whether it is
input services, whether it is capital goods, whether it is manufactured
products are set off against the output liability of GST.

The GST law treats job work as a service and seeks to maintain
existing excise procedures for the job work transactions, i.e. non
taxability of job work transaction and providing credits to the principal
for supplies to job worker 180 days condition for bringing back goods
after job work. The automobile industry for vendors to develop tools for
the manufacture of parts of automobiles. The ownership of such tools is
transferred to the OEMs, and the cost is also recovered from OEMs.
However, the tools are physically located in the vendor's factory for
manufacture of parts. As specified in model GST law the definition of
capital goods covers only those goods which are used at the place of
business of supply of goods. Thus, only goods which are used in the
place of business of OEM seem to be eligible for GST credit in the
OEM‟s hands. This could possibly result in increase in the cost of
totaling and cost for manufacture. The automotive industry has
witnessed several cesses including automobile cess, NCCD, tractor cess
and infrastructure cess. In the discussions on GST, the Government has
indicated its intention to subsume all Central and State cesses into GST.

The existing CENVAT credit rules the input tax credit will be
allowed only of those goods falling within specified chapters to the
model GST law. Further the definition of inputs and input services also
provides for exclusions. Therefore, it appears that even under GST,
restrictions on input tax credit will continue. Generally, states provide
for various incentives including investment promotion subsidies (IPS).
A majority of the automobile manufacturers enjoy special benefits from
the State government in the form of State investment promotion
subsidies (IPS). This is given in the form of refund of VAT/CST paid.
The implementation of GST, taxes move from the origin state to the
consumption state. This could result in significant reduction of flow
back of IPS, since GST on inter state sales is not credited to the origin
state unless on inter state sales is not credited to the origin state unless
there is a compensation mechanism to the states or to the OEMs with
regard to the impact on the IPS due to GST.

EXISTING EXCISE DUTY RATES

Vehicle Category Excise Duty

Small cars 12.5%
Length >4m but engine capacity less than 1500cc 24%
 Length >4m and engine capacity more than 1500cc 27%
SUVs/MUVs (length >4m, engine capacity >1500cc
and Ground clearance >170mm) 30%
Hybrid cars 12.5%
Specified components of Hybrid vehicles 6%
Electric cars, Buses, 2W & 3W 6%
Specified components of Electric vehicles 6%
Buses 12.5%
Trucks 12.5%
Three wheelers 12.5%
Two wheelers
12.5%

EXISTING IMPORT DUTY RATES

Criteria / Applicability Import

Duty in %
Used car import 125
Cars CBUs whose CIF value is more than $ 40,000 100
or Petrol Engine > 3000 CC 100
or Diesel engine > 2500 CC 100
Cars CBUs whose CIF value is less than $ 40,000 60
and Petrol Engine < 3000 CC 60
and Diesel engine < 2500 CC 60
Two-wheeler CBUs with engine capacity <800 cc 60
Two-wheeler CBUs with engine capacity >=800 cc 75
Commercial Vehicle CBUs (Trucks & Buses) 20
CKD containing engine or gearbox or transmission 30
mechanism in pre-assembled form, but not mounted
on a chassis or a body assembly
CKD containing engine, gearbox and transmission 10
mechanism not in a pre-assembled condition

TAX RATE FOR THE INDUSTRY

The tax rate on inputs and output should be fixed considering the
pattern of input purchase and output sales which varies considerably.
This has implications for the input tax credit. While vehicle
manufacturing takes place in a few states with supply to other states
(local sales account for less than 10% of total domestic sales), the
majority of components (around 70% - 80%) are procured from vendors
within the state. If tax rate of components/inputs is more than the tax
rate at the time of supply of complete vehicles (Completely Built Units),
then refund would arise.

SUGGESTIONS OF TAX BASE & LEVY

1. Uniform rate of tax should be charged on complete vehicles
(whether by way of sale or by way of transfer) and inputs, against
which input credit should be allowed.
2. Tax paid on complete vehicles on movement from factory should
be made available as input credit to the vehicle dealers.
3. Manufacturers could give state-wise break-up at periodically to
respective state governments who may settle it through the
appropriate clearing house mechanism.
4. Considering the current level of taxation, a suitable tax rate may be
adopted. Tax rates should be uniform across states and there
should be one authority to which payment would be made by way
of one Challan.
5. Goods and services should be classified on the basis of HSN and
GATTS (at both central and state levels).
6. A common base should be adopted for taxation of both Central and
State GST. Under the present taxation system, interstate sales tax
and local sales tax is levied on excise duty in respect of the
manufactured goods resulting in cascading of taxes.
7. In case of non-sale, where the transaction value of goods or
services is not determinable and when GST is charged, a simple
mechanism of valuation could be adopted on the basis of cost.
8. Under GST, it is suggested that the basis of tax credit should be on
„Cost to Business‟, i.e. tax, which is paid and forms cost to
business should be allowed as a tax credit, both at the Central &
State level.
9. The document based credit should also be dispensed with and
could be substituted by appropriate certification by an independent
Chartered Accountant (or the Appointed Company Auditors). The
same could be subject to appropriate audits by trained government
officers and could be IT enabled.
10. Diesel and motor spirit should be brought under GST with
input tax credit and mechanism to avail the same. VAT on diesel
and motor spirit constitutes a significant element of cost for the
transport industry.
11. In the proposed GST system, it is not known whether the
stock transfer would remain exempted from tax (at present, sales
tax is not levied on Stock Transfer) or would be made taxable in
the importing state; the industry needs to understand the treatment
of stock transfers for the purpose of input tax credit.
12. There should be no distinction between input and capital
goods. Presently, definition of Capital Goods under Central excise
law and state VAT is not uniform. Under State VAT, definition of
capital goods and also the rate of taxation vary from state to state.
 As regards periodicity of taking credit, excise and VAT laws
differ.
13. In respect of existing exemptions having sunset clause,
appropriate transitional provisions should be introduced to ensure
continuity of existing benefits. A clarification is needed on how
the existing sales tax benefit schemes e.g. loan, deferral would be
affected.
14. The State Goods and Services Tax Act, State GST Act
should be a common Act operated/implemented by all the states
and Union Territories (similar to present Central Sales Tax Act)
covering transactions related to goods, services and exports.
15. Concept of „Tax Invoice‟ should be continued for availing
State GST credit.
16. To ensure viability of EOU under severe competition, timely
refund of tax is needed. Effective refund system should be in place
for smooth operations of EOUs. Presently, EOUs are eligible to get
refund of CST on interstate purchase of inputs used in the
production of export goods and local VAT content of the export
product is allowed to be deducted against the DTA Sales and the
balance, if any, is allowed as refund.
17. Under a dual GST structure (a Central GST and a State
GST), there could be a situation where the Input Tax credits which
remain assizes would be refunded to the assizes. Since the cross
 utilization of credits between the Central GST and State GST is
not permitted, there could be a situation of payment on the one
hand and a refund situation on the other. In order to avoid this
situation cross utilization of input tax credits should be allowed.
18. Procedural changes should be notified in advance. The
industry should be given 6 months lead time before the
introduction of GST.
19. State specific incentives should be protected under GST.

GST IMPACT ON AUTOMOBILE AND SPARE PARTS

INDUSTRY IN INDIA

The automobile Industry is coping up with the GST regime as the

government is very cautious particularly for this sector. The industry of
automobiles is tremendously big which tackles the manufacturing of a
very large chunk of cars and bikes every year. The population across the
nation is also the major factor of this turbulence as it constantly seeks for
dynamic technology and newer models. The GST subsumes almost all
the taxes under its ambit like excise, VAT, sales tax, road tax, motor
vehicle tax, registration duty which will further benefit the procedural
ways of the automobile industry.
GST IMPACT ON AUTOMOBILE INDUSTRY
THROUGH E-COMMERCE PLATFORM
The Co-founder of Boodmo, Oleksandr Danylenko, said in a
statement that, E-commerce businesses especially auto components and
logistics of spare parts have been adversely influenced by complex GST
process. With the several factors like uplifting of composition scheme on
e-commerce business along with higher 28 percent tax on both auto-
components and spare parts logistics involving complex GST process
has lead to negative impact on e-commerce start-ups concerning
automobiles industry. Automobile manufacturers were not able to file
claims since July and nearly Rs 1,000 crores have been stuck in GST
refund.

Automobile exporters are in worrisome as the current GST scheme

of making payments upfront and claiming of input tax credit refund is
not working properly. The working capital requirement for automobiles
industry has enhanced and they could consider on exports till their issues
are not resolved. David Schock, CFO of Ford India said that the
compensation cess has enhanced to 1-22 percent under GST, earlier it
was 1-4 percent. Discussing on issues faced by automobile exporters,
Society of Indian Automobile Manufacturers (SIAM) Deputy Director
General Sugato Sen said that, the automobile companies which are
especially dealing in export are facing problems, as the current GST
system of making payments upfront and claiming of refund tax system
indirect tax regime is not working properly under GST.

However, going in deep and bifurcating per product impact will be

senseless as the GST rules and rates may get a shuffle due to individual
exemptions and incentives provided according to the model and its
growth.

GOVERNMENT NOTIFIED GST TAX ON

AUTOMOBILES
Categor Engine Pre- Post-GST + Final
y GST Cess

Under 4- Under 1.2-litre Petrol 31.5% 28% + 1% 29%

metres

Under 4- Under 1.5-litre Diesel 33.25% 28% + 3% 31%

metres

Under 4- Above 1.2-litre Petrol or 44.7% 28% + 19% 47%

metres 1.5-litre Diesel

Above Above 1.2-litre Petrol or 51.6% 28% + 25% 53%

4-metres 1.5-litre Diesel

SUVs – 55% 28% + 29% 57%

Hybrids – 30.3% 28% + 25% 43%

Electric – 20.5% 12% + 0% 12%
Vehicles
(EVs)

In the previous form of taxation, advance received on goods supply

is not attracting Excise/VAT and composite rate while in some of the
states there is VAT applicable on used cars sales. While many of the
states do make available OEM Original Equipment Manufacturers
(OEMs)/component manufacturer linked with a various investment
linked incentive scheme. The significant components can be considered
as interest-free loans and subsidies being attached with CST/VAT paid
on the sales.

Read Also: GST vs VAT: Simple Way to Describe the Differences

It is also learned that the selling of goods and services unattached to a
form of consideration is exempted from taxes under the service tax and
VAT. While the dealers and importers are not eligible for the excise duty
and CVD which is paid by the OEMs (Original Equipment
Manufacturer). The current tax rules mentioned that VAT/CST is not
applicable but excise duty is certainly on the tax part while transferring
any goods from the manufacturers place and factories. As these vehicles
have exemptions from auto cess/Nccd: electrically operated vehicles,
three-wheeled vehicles, hydrogen vehicles based on fuel cell technology,
vehicles used solely as taxis, the ones used by physically handicapped
persons, hospital ambulances.

GST IMPACT ON INDIAN AUTOMOBILE INDUSTRY

Overall it is defined that the GST impact on the automobile
industry is less than the previous tax scheme due to the lowered tax
scenario. As the automobile industry has already gone through some
tough situations like demonetization and after which emissions norms
rule hit the grounds of automobiles sector. It is now done that the
industry will get benefits out of GST with minimum hassle-free
procedures and rate fixation across the nation.

As there will be more or less similar case for the smaller cars due
to the analytics of rates comparing from both the pre-GST and post-GST
effects. The tax scenario has been adjusted in between 1 to 15 percent in
which the small cars are being charged with 1% Cess rate with 28%
GST while talking about the middle sized cars it is being levied with the
3% Cess and for the luxury cars segment, it is fixed at 25% Cess.

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IRONY OF GST ON SPARE PARTS: TAX ON HIGHEST
LEVEL
According to the recently surfaced, spare parts bill of an
automobile, it seems that the GST rates are a big issue within the
industry. On a bill of 35,000, it was seen that a tax of 10000 was levied.
It was a hefty charge upon the billing as tax amount is taking a toll on
the pockets of the consumers.

A tax rate of 28 percent on the spare parts is a heavy tax rate as

most of the consumer base pay the charges on a natural act of wear and
tear or upon accidental damages. Bringing such a heavy tax rate upon
such incidents have made the market much more sensitive regarding the
price issues.

As the spare parts of vehicles both commercial and private had

fallen into the bracket of highest slab rate i.e. 28 percent, it made a
misery moments for the spare parts trading community. Also, the
complex compliance makes it more vicious for the traders to indulge in
any kind of taxing activity. The trading of spare parts is completely
disrupted after the implementation of GST including the much-hyped
Delhi’s Hamilton road.

Many of the traders complained that the GST made their business
to the lowest rank and are expecting only 10 percent of the business of
what they were earlier doing. The tax rates of 28 percent are much
higher than previously applicable 12 percent and now the customers are
not willing to pay this much of taxes.

The scenario of taxes can be understood, like a wholesaler in

Gurgaon paying 28% tax in Delhi to acquire goods worth Rs 1,000. The
GST comes out to be Rs 280, including Rs 140 as Central GST and Rs
140 as State GST. Since the supply has been made over the counter in
Delhi, the buyer can claim ITC on the SGST of Rs 140 and only if he is
registered under Goods and Services Tax as a trader in Delhi. The auto
parts industry states this equation to be the main factor of decreased
sales after the implementation of GST.

ON THE BASIS OF THIS, THE CONCLUSION COMES

AT:

 Luxury cars – The tax rates are combined at 42 to 45% in the GST
era as compared to more than 50% above rates previously and has
made a cheap tax rate scenario for the luxury cars GST rates.
 Small cars – The earlier tax rates were concluded at 29% including
VAT and other local levies while in the GST scenario, the same
impact is created with 28% GST and 1% cess rate on it.
 Hybrid cars – The biggest damage considered in the automobile
sector can be attributed to the hybrid vehicle despite its promising
future in the environmental sustainability. It has been levied with
28% GST rates along with the 25% extra cess on it.
  Spare Parts – Spare parts are levied with 28% tax rate which is
highest of the slab. Although the tax rates are recovered in initial
state but the government choose to carry forward tax scenario on
secondary items also.

While it is totally upon the discretion of automobile manufacturers

to increase or decrease the prices of vehicles, it is to be seen in
upcoming future to have stable effects on the whole industry.

GST BECOMES POSITIVE FOR COMMERCIAL

VEHICLES SALES
As soon the GST got to see the day of light in India, there were
some foremost benefits emerged in the economy as well as in many of
the sectors. One of them is automobiles sectors, including all the
segments, passengers as well as commercial vehicle segments. Also,
the GST e-way bill made some possibilities for the vehicles to roam free
without any border checking.

In the same manner, the commercial vehicles are now way much
ahead in productivity than earlier situations. The logistics companies are
considering to increase the inventory of the commercial vehicle as the
vehicles are now capable to take the much higher load and can transport
eh cargo in much less time than previously taken.
Binaifer Jehani, director, CRISIL Research stated that “As hubs get
bigger, and more concentrated for a few industries, preference will shift
to much higher-tonnage HCVs (towards 37T multi-axle vehicles and
higher-tonnage tractor-trailers). Also, new product offerings by OEMs in
the higher tonnage intermediate commercial vehicles (ICVs) segment
will continue to gain traction along the spoke routes.”

The automobile manufacturer is also in discussion to make higher

capacity vehicles to serve the industry which is ready to offer an order of
commercial vehicles in anytime soon. The sales trend in the 35T, 40T,
49T tractor-trailer segment has been providing much evident proof that
the logistics industry will be improving soon.

With GST in the picture, good roads with better compliance

procedure in the middle of the journey as well as better technology has
given a positive hint to the automobile manufacturers to make more and
more commercial vehicle. Tata Motors, Ashok Leyland, BharatBenz,
Mahindra & Mahindra and VE Commercial vehicles are some of the
vehicle providers who are standing in the first row to cater the
evergrowing logistics industry.

LUXURY CARMAKER MERCEDES OBJECTION

Even Mercedes Benz is not at all happy with the frequent tax rate
changes done by the GST Council. Earlier in July when the GST was
implemented across the nation, there was not much-known information
available on the topic but now as the time passes, it has unveiled that the
actual implementation has taken a toll on various business.

The impact has certainly reached to the luxury carmaker Mercedes and
has gone up to say that frequent tax rate changes may take away future
projections under anonymity. The luxury cars put down into sin tax
category with an increased charge of Cess overall taking the tax incident
up to 50 percent on various models.

The sale of luxury automobiles is already under lower stats and

higher tax applicability will take away its chance to grow further in the
country. The carmaker also made some unexpected comments and said
that there is higher risk involved in planning as the government tax rate
tweaking is more than enough.

AUTO SECTOR WANTS THE GOVERNMENT TO

ELIMINATE CESS ON CARS UNDER GST
The sharing of GDP in the automobile sector of the country is 7
percent, so it is important to discuss this issue in the budget. With the
fifth position in four-wheeler sales and first position in the sales of two-
wheelers, India is the largest automobile market in the world.
SOCIETY OF INDIAN AUTOMOBILE
MANUFACTURER
(SIAM) Association had demanded earlier this year that all
passenger vehicles should be categorized into two separate slab rates
under GST. Currently, 28 percent tax and an additional 1 percent cess
are being levied on small petrol cars whereas 28 percent tax and an
additional 3 percent cess is being imposed on small diesel cars. All other
cars including Hybrid ones attract a 28 percent GST and an additional 15
percent cess. SIAM is demanding that the government should remove
the cess completely from all these cars. However, this is not expected to
happen as the government cannot actually remove cess from all
categories of cars.
CHAPTER:-2

REVIEW OF LITERATURE

The structure and loopholes of the Goods and Services Tax in

India was examined in the first discussion paper of the Empowered
Committee of Finance Ministers (2009). Poddar & Ahmad (2009)
discuss different aspects of GST implementation, relating to the
principles, issues, and procedures. The paper cited the introduction of
GST to be the most significant tax reform in India, increasing tax
compliance and transparency. Vasanthagopal (2011) focussed on how
GST would be a significant improvement over the prevalent complex
indirect tax system in the context of different sectors in the economy.
FICCI (April 2013) emphasized GST to be a necessary condition for
achieving double digit growth in India, provided all the stakeholders are
prepared for the change. Mawuli (2014) suggested GST to be less than
10% in low income countries to mitigate the adverse effect of GST.
Kumar (2014) highlighted GST’s role in eliminating economic
distortions by enabling the developing a unified national market with a
common tax rate. Pinki and Verma (2014) illustrated that GST would
result in a number of benefits for all the stakeholders involved,
consumers, government at the central and state level. The study also
highlighted robust IT infrastructure to be imperative for GST to be
implemented successfully. Sehrawat and Dhanda (2015) concluded GST
to result in increased output, employment and economic growth, owing
to greater transparency. Caruso et al. (2016) suggested GST to aid
economic development of India and also lead to an increase in the GDP
by more than 2%. Khurana & Sharma (2016) point to the role of set offs
available, as an advantage to the producers and consumers in the Indian
economy. Rizwana (2016) found GST to have a positive impact on the
employment and economic stability, thus improving the growth
prospects of India. Kumar (2016) compares GST and the present system
of taxation and mentions tax credit set off to be an important
distinguishing factor. Lourdunathan & Xavier (2017) discuss the
challenges in implementation of GST and identify prospects of GST that
would benefit the producers and consumers. The prior literature
discusses GST as a concept and illustrates its benefits theoretically.
Empirically, the focus on the impact of GST on economic growth,
employment exists. The present study attempts to fill this research gap
by empirically examining the impact of GST on the two chosen sectors
of the economy – Real Estate and Automobiles sector, with significant
contribution to the economic growth. The study also provides a
comprehensive view on the GST implementation in this context.

AUTOMOBILE SECTOR

India’s automobile exports contracted 9.7% during the first quarter

of this fiscal year with a growth of approximately 1.91% over the
previous fiscal year, with commercial vehicle segment leading the
export growth. The automobile industry seems to be thrilled with the
notion of a simplified tax regime, which can be achieved through the
introduction of GST. The current tax structure on automobiles is riddled
with complexities. Currently, automobile sales are subject to six
different types of tax at various rates, which includes Excise Duty,
Infrastructure Cess, Octroi, VAT, Motor Vehicle Tax/Road Tax and Tax
Collected at Source (TCS). At present, the excise duties on vehicles are
divided into four slabs, in which the smallest tax rate is applicable to
small cars. The current indirect tax provision comprises of: Small cars
(less than 1200 cc) attract 27.6% tax (Excise Duty 12.50% + sees 1.1 %
+ VAT 14%) Medium cars (1200 cc - 1500 cc) attract 39.1% tax
(Excise Duty 24% + sees 1.1 % + VAT 14%). Luxury cars (beyond
1500 cc) attract 42.1% tax (Excise 27% + sees 1.1 % + VAT 14%).
SUVs (beyond 1500 cc) attract 45.1% tax (Excise Duty 30% + sees 1.1
% + VAT 14%). Owing to different types of indirect taxes collected by
the Centre and State separately, taxes paid on some of the inputs were
not set-off against the final tax. With the GST implementation, the
automobile industry will be benefited in the following ways: Taxes
levied by the Central government, such as Excise Duty and by state
governments as Sales Tax would be subsumed into one tax uniform tax.
If the proposed tax rate of 18-20% are approved, the prices of vehicle
are expected to decrease by almost 8-18%, which will then lead to
increase in demand for automobiles in the domestic market but will also
make India-made vehicles more cost-competitive in export markets. All
input taxes paid will be offset against the output liability of GST. Since
CST will be subsumed in GST, manufacturers will no longer be required
to have warehouses at multiple locations across states. The overall
compliance burden is expected to decrease and bring lots more
efficiency in operations. Due to complexities in the current tax
structure Foreign investors were reluctant to invest in India, primarily
because of the country’s regulatory and bureaucratic complexities. A
successful enactment of the new indirect tax regime would have a
transformative effect on FDI in India. Since GST will also lessen
overall production cost and hassles, thereby encouraging domestic as
well as international car manufacturers to expand their businesses and
make Indian products more qualitative and competitive across the world.

While the automobile industry is betting big on the new indirect

tax regime, it still has some apprehensions of the same: How will the
new rates be decided? Will there be a uniform rate for all sizes of cars?
Will they all fall under the same 18-20% tax rate bracket? The
Automobile industry has seen significant disputes under central excise
valuation. The GST law continues with the concept of 'transaction
value' which is a welcome measure, however the powers for rejection of
the transaction value are very wide, and could lead to significant
valuation disputes. The job work process is the backbone for
automobile industry operations. The GST law treats 'job work' as a
service and seeks to maintain existing excise procedures. However,
some more clarity is needed in the conceptual framework for job work
as it will pose as a challenge. Lack of clarity on subsuming of various
cases applicable in the automobile industry. In the proposed GST
system, it is not known whether the stock transfer would remain exempt
from tax (at present, sales tax is not levied on Stock Transfer) or would
be made taxable in the importing state; the industry needs to understand
the treatment of stock transfers for input tax credit. Dealer incentive
Schemes and MOU with the states. Overall economic activity is
expected to increase and we could expect a better GDP growth that
should push demand for vehicle across categories. Impact of Tax
cascading will also go away that will reduce overall cost of vehicle
manufacturing as all taxes on input paid will be offset with the output
liability of GST. The industry should be given sufficient lead time for
adaptation before the introduction of GST.
CHAPTER:-3

RESEARCH METHODOLOGY

 The Indian automobile market can be divided into several segments

viz., two-wheelers (motorcycles, geared and ungeared scooters and
mopeds), three wheelers, commercial vehicles (light, medium and
heavy), passenger cars, utility vehicles (UVs) and tractors.
 Demand is linked to economic growth and rise in income levels.
Further, it is inversely related to the interest rates and fuel prices as
85% of the total vehicles are bought on credit. Per capita penetration
at around eighteen cars per thousand people is among the lowest in
the world (including other developing economies like Pakistan in
segments like cars).
 While the industry is highly capital intensive in nature in case of
four-wheelers, capital intensity is a lot less for two-wheelers.
Though three-wheelers and tractors have low barriers to entry in
terms of technology, four wheelers are technology intensive. Costs
involved in branding, distribution network and spare parts
 availability increase entry barriers. With the Indian market moving
towards complying with global standards, capital expenditure will
rise to take into account future safety regulations.
 As compared to their global counterparts, both the two-wheeler as
well as four wheeler segments are relatively lesser fragmented.
However, things have changed, especially on the passenger cars
front as many foreign majors have entered the Indian market. As a
result, pricing power is likely to diminish going forward.
 Automobile majors increase profitability by selling more units. As
number of units sold increases, average cost of selling an
incremental unit comes down. This is because the industry has a
high fixed cost component. This is the key reason why operating
efficiency through increased localization of components and
maximizing output per employee is of significance.

HOW TO RESEARCH THE AUTOMOBILE SECTOR

(KEY POINTS)
 Supply
 The Indian automobile market has some amount of excess capacity.
 Demand
 Largely cyclical in nature and dependent upon economic growth and
per capita income. Seasonality is also a vital factor.
 Barriers to entry
 High capital costs, technology, distribution network, and availability
of auto components.
 Bargaining power of suppliers
 Low, due to stiff competition.
 Bargaining power of customers
 Very high, due to availability of options.
 Competition
 High. Expected to increase even further.

FINANCIAL YEAR '16

 A total of 18.9 m two-wheelers was sold in FY16, a growth of a

tepid 2% over the previous year. The slow growth was on account
of the tepid recovery in the Indian economy. Motorcycles accounted
for 65% of the total two wheelers sold and were flat YoY. The
scooters (geared & ungeared) segment was the only hope the two
wheeler industry logging in a growth rate of 8% YoY. In the
domestic market, volumes in the 3-wheeler segment were up 1%
YoY. However, given the currency issues in the major emerging
economies the exports declined by 15% YoY.
 After good growth in last year, FY16 also proved to be strong year
for the medium and heavy commercial vehicles (M/HCVs) segment
as volumes increased 28% led by reversal of mining bans,
resumption of some stalled infrastructure projects, improvement in
 freight rates and overall operations of fleet operators. LCVs, after
facing a heat in FY15 continued the tepid trend and was flat for the
year. As a result, volumes for the overall CV industry grew by 12%
YoY.
 Volumes of passenger vehicles (PV) declined by 1% YoY. Within
this, passenger cars grew by 6% YoY, however with some exciting
products launched in FY16, the Utility vehicles (UVs) grew by 11%
YoY. Maruti Suzuki remained the market leader in the passenger
vehicles space. In addition to the market leader in the passenger car
segment, company introduced two landmark products in the Utility
Vehicles and thus has started gaining market share in that segment
as well.
 Most of the companies reported an improvement in operating
margins largely on account of various cost rationalization measures
undertaken and benign commodity prices.

PROSPECTS
 With the Modi government in power, there are expectations of
increased focus on reforms and ramp up in infrastructure. Thus,
government spending on infrastructure in roads and airports and
higher GDP growth in the future will benefit the auto sector in
general. We expect a slew of launches both in passenger cars and
utility vehicles (UVs) given that the competition has intensified.
 The multi-year low interest rates and subdued petrol prices augurs
well for the Indian auto sector. Historically, the demand for the PVs
has been negatively correlated to the interest rates. Further, the 7th
pay commission payout will also play out well for the auto Industry
in FY17.
 Historically, the Indian Passenger car market has been skewed
towards small passenger cars. However, there is a structural change
taking place in the industry with demand for UVs taking over the
passenger car. This shift is paving a way towards new avenues of
the growth and will result in a more profitable growth for the sector.
 In the 2-wheeler segment, motorcycles are expected to witness a
flurry of new model launches. Though the market size is expected to
grow by 10% to 12%, competitive pressure could keep prices and
margins under control. TVS, Honda and Hero Motocorp will
continue to benefit from higher demand for ungeared scooters in the
urban and rural markets. In the last four years, scooters have grown
at a faster clip than motorcycles and this trend is expected to
continue going forward. The 3 wheeler industry, where Bajaj Auto
is the market leader, is also poised for growth on the back of new
permits and increase in exports.
 While good monsoon is a positive for the tractor sector, assuming
that non-farm incomes climb up, volumes should hold up well in the
longer run despite a year or two of poor monsoons. The longer-term
 picture is healthy in light of poor mechanization levels in the
country’s farm sector and the thrust of the government on improving
rural infrastructure.
 Demand for HCVs is expected to grow by 7% to 8% over the long
term. The privatization of select state transport undertakings bodes
well for the bus segment.

CHAPTER-4

BACKGROUND OF THE STUDY

India is on the verge of a giant leap from the current indirect tax
regime to the new indirect tax regime, namely Goods and Services Tax
(‘GST’), scheduled to come into effect from 1 st July, 2017. GST is a new
chapter in Indian economy, possibly the biggest or one of the biggest
and most significant tax reforms India has witnessed ever since the
independence. The entire structure of taxation on goods as well as
services is being realigned into a single destination based value added
tax as against the current origin based set up of multiple taxes with
limited credit for the tax suffered on earlier transactions in the chain.
Therefore, GST is going to impact everyone in the economy - each
sector across the business world - manufacturing, trading, construction,
exports, banking & finance, insurance, professionals, all sorts of services
etc., the governments at all levels, even the judiciary and hence
ultimately the Common Man who pays for the goods and services. The
impact would depend on effect of changes on one’s business as also on
one’s ability to analyse the impact of changes not only on own business
but also that in procurement and distribution chain to optimize the
benefit under the new regime. The changes may have positive or
negative implications for a given business entity or segment of an
industry or given industry as a whole. Automobile industry is one of the
largest in the world, growing and dynamic sectors in the Indian
economy, having complex operations from tax angle and subjected to
fairly high rates of taxation under the current provisions and would
obviously have wide implications, both positive and negative, on change
over to GST. The annual production of industry was 23.96 million
vehicles in FY (fiscal year) 2015–16, following a growth of 2.57 per
cent over the last year. The automobile industry accounts for 7.1 per cent
of the country's gross domestic product (GDP). The Two Wheelers
segment, with 81 per cent market share, is the leader of the Indian
Automobile market, owing to a growing middle class and a young
population. Moreover, the growing interest of companies in exploring
the rural markets further aided the growth of the sector. The overall
Passenger Vehicle (PV) segment has 13 per cent market share. India is
also a prominent auto exporter and has strong export growth
expectations for the near future. In FY 2014–15, automobile exports
grew by 15 per cent over the last year. In addition, several initiatives by
the Government of India and the major automobile players in the Indian
market are expected to make India a leader in the Two Wheeler (2W)
and Four Wheeler (4W) market in the world by 2020.

The automobile industry broadly comprises of the following:

 Automobile Manufacturers (OEMs), who manufacture Motor

Vehicles – broadly divided into four segments viz. passenger cars
including utility vehicles, commercial vehicles – for goods &
passenger application, two wheelers and three wheelers, each
having different business processes, tax structure and therefore
issues related to taxation.
 Auto Ancillaries supplying components to the OEMs
 Dealers of OEMs
GST would impact each of the above constituents of the auto
industry. This article intends to highlight the key GST impact areas
mainly from the OEM perspective. As stated, OEM constituent has
segments and each segment – notably passenger cars, has further sub-
segments, each having different features and hence different tax
implications. However, in this article we have dealt with implications
from the point of view of OEM as single sector and wherever the
implication is significant and related to one of the segments / sub-
segments, made reference to the same. Moreover, since we are trying to
cover all the implications or impact areas for the sector in this single
article, number of them have been summarized though quite a few of
these issues can be subject matter of detailed discussion. Also, we have
concentrated mainly on Motor Vehicles and not so much on spare parts
and service activities of OEMs.

1. Quantum of tax burden on the end customer:

The impact areas are as follows:

a) Currently, the Motor Vehicles are subject to multiple indirect taxes

viz. Central Excise Duty, Automobile Cess, Infrastructure Cess,
National Calamity Contingent Duty (NCCD) as applicable depending on
tariff classification, Central Sales Tax (CST) on inter-state sales, and
State level taxes notably Value Added Tax (VAT) and other taxes like
Entry Tax, Local Body Tax, Octroi etc. varying from State to State,
which all get passed on to the end customer. There is tax cascading also
in as much as CST & VAT are payable on the value inclusive of Central
Excise duty & other central levies and VAT is payable on CST. CST
impact of 2% & cascading effect thereon is particularly relevant for cars
& two wheelers which are sold directly from OEM factory to dealers,
most of which are inter-state sales. At present, depending upon the type
of vehicle, the indirect tax burden in the hands of ultimate customer
could generally vary somewhere between 28% and 56% of the price.
Under GST, all these duties, taxes and cesses would be subsumed and
cascading effect avoided. The expected combined rate of tax under GST
for Motor Vehicles is 28% or 28% plus cess at the rate ranging from 1%
to 15% depending on type of vehicle except the electric cars which will
attract 12% tax.
b) The outbound supply chain is restricted between manufacturer and
dealer and there are no other intermediaries, except for sales of spare
parts, which means limited amount of margins in the distribution chain
as compared to number of other trades with longer chain in distribution.
Under GST, price to end customer would be subjected to full tax
incidence as against Central Excise Duty currently applicable only on
manufacturer’s price and not the trading margins. Though moderately,
this would broaden base for tax levy in GST and hence would have
adverse cost implication for end customer.
c) The OEM factories typically supplying given model of vehicle to
dealers spread across the country, either directly or through depots,
involves good amount of expenditure on outbound logistics. Under the
current regime, no Central Excise Duty and CST are liable on
transportation cost for vehicles directly sold from OEM factory to
dealers whereas under GST such transportation cost would suffer tax at
the same rate as applicable for the Motor Vehicle. This would have
adverse cost implication for cars and two wheelers where the
distribution model of direct sales to dealers is a common practice.
14. A chart showing expected combined rate of tax under GST
including the Cess where applicable vis - a - vis rate of tax burden
currently on end customer for different types of Motor Vehicles is
appended. As stated in (b) and (c) above, in GST the rate would apply
on a wider base value. If we see the rates under GST, the tax rate on
high end passenger cars viz. large cars and sports utility / utility vehicles
with specified higher features (both attract very high rate in the current
regime), would significantly reduce. However, these high end cars are
sold in relatively much less numbers. In case of small cars which
account for bulk of domestic car sales as also for the commercial
vehicles and two/ three wheelers, the change is marginal when we also
consider the increase in base value for tax computation.
Post GST Change In percentage of tax applicable on various Motor
Vehicles

Post GST
Likely
Sr. HSN Post Difference

No. Type of Vehicle Code Pre GST duties & taxes GST in tax

(CGST
Central +
Excise VAT & SGST

incl. CST* incl.

Cesses (Approx.) Total cesses)

% % % % %
 Passenger Cars
1 including UVs: 8703

Small Car -
(a) Petrol 14.63 18.07 32.70 29 -3.70

length < 4000mm

engine cc < 1200

Small Car -
(b) Diesel 16.13 18.31 34.44 31 -3.44

length < 4000mm

engine cc < 1500

Mid - segment
(c) Car 29.13 20.37 49.50 43 -6.50

length > 4000mm

engine cc < 1500

(d) Large Car 32.13 20.83 52.96 43 -9.96

length > 4000mm

engine cc > 1500

Sports Utility
Vehicle/ Utility
(e) vehicle 35.13 21.30 56.43 43 -13.43

length > 4000mm

engine cc > 1500

ground clearanc e
> 170 mm

Hybrid Car -
Mid segment &
(f) large 13.63 17.91 31.54 43 11.46

engine cc < 1500

& engine cc >
1500

(g) Electric Car *** 7.13 8.70 15.83 12 -3.83

Fully Built
Commercial
2 Vehicles

(Goods truck, 8704

bus > 13 persons ) &
(a) Diesel 8702 12.63 15.20 27.83 28 0.17

Special Purpose
(b) vehicles 8705 12.63 15.20 27.83 28 0.17
 Chassis - diesel
3 - for Goods truck 8706 13.13 15.27 28.40 28 -0.40

-for bus > 13

persons 14.13 15.40 29.53 28 -1.53

Two Wheelers -
4 Petrol 8711

Motor cycles -
engine capacity >
350 cc 13.63 17.91 31.54 31 -0.54

Other Motor
cycles, scooters,
mopeds 13.63 17.91 31.54 28 -3.54

Three wheelers ( 8703

other than &
5 electric) 8704 12.63 17.75 30.38 28 -2.38

20. Varies state to state & depends on distribution model. Cars and 2/3
wheelers are generally sold from OEM factory to dealers directly and
then by the dealers locally. Sales from OEM factory to dealers are
mostly inter-state. Hence, effect of CST @2% & VAT @13.5% both
considered, including cascading effect. Commercial vehicles generally
sold from depots. Effect of VAT @13.5% only considered on value
inclusive of Excise Duty. Some other local taxes may also apply. Hence,
overall % indicated is approximate %.
* Dealer margin is not subjected to Central Excise Duty and CST.
Similarly, in case of cars and 2/3 wheelers generally sold directly from
OEM factory to dealer, the transportation charges are not subjected to
Central Excise Duty. These two elements would be subjected to GST
which factor needs to be considered while making comparison.
* Some exemptions under VAT in some of the states. VAT rate
considered in working at 6%. Actual impact will depend on VAT rate in
respective State.
e) The concessional rate for Hybrid cars is withdrawn in GST and
they would be subjected to tax @43%, a major set- back to the
upcoming segment. As for electric cars, the impact would depend on
different VAT rates currently applicable in respective States.
f)Post sale services like insurance, AMC, servicing, repairs etc. may cost
more to the customers with increase in rate of tax on services. As
regards repairs, there is some ambiguity as to their treatment as supply
of goods or as supply of services whether to be treated as composite
supply with significant 10% difference in rates applicable on
components and service.
g) State Level Vehicle Tax / Road Tax is not subsumed in GST and it
will continue to be a cost to the customer. If taxes on acquisition of
vehicle reduce, some States may be tempted to hike the Vehicle Tax.
The Automobile Industry had strongly recommended that the Vehicle
Tax be subsumed in GST which is not acceded to by the Government.
(SIAM recommendations on GST).
h) Car / vehicle leasing is expected to cost more to the customer with
lease taxed at the same rate of central (& State) tax as applicable for sale
of car / vehicle and further there being no transitional provision for
credit of taxes already paid in respect of cars/ vehicles under on – going
leases as also with no abatement for amount representing as interest in
transactions for financial leasing including hire purchase, currently
available under service tax.
IMPACT ON COST OF PRODUCTION AND
DISTRIBUTION:

Under the present tax structure, the OEMs are eligible for input tax
credit of Central Excise Duty and VAT on their procurement of inputs
and capital goods as well as for input tax credit of service tax on most of
the services they avail. Their transactions are with registered entities and
credit chain is well established to capture and avail of the input tax
credits eligible. However, in the current structure there are inherent
limitations on credit eligibility whereas under GST, input tax credit
would be fully allowed barring a few exceptions, thereby cost incidence
of tax paid at earlier stage in the supply chain would be totally avoided.
This would lead to tax neutrality in both inward and outward
transactions and business decisions can be made based purely on
operating efficiency rather than on tax considerations. All this in effect
would reduce the cost of procurement & production as well as cost of
distribution which would be the biggest benefit to industry in GST. The
main potential areas for saving / additional benefit under GST are as
follows:

a) Saving of 2% CST on inter- state procurement.

b) Saving in VAT surrender where the sales to customers in other States
are routed through depots - commercial vehicles as well as on transfers
of semi-finished goods to other factories – 4% or even more of
corresponding purchases within State.
c) Saving in octroi/ LBT/ Entry Taxes without credit on procurement.
d)Input tax credit on outward transportation – net benefit where the
vehicles are sold through depot – commercial vehicles.
e) Vendor price reductions for corresponding benefits in supply chain
as also towards excise duty on any transactions in the supply chain with
entities not registered. Tax cascading effects in supply chain which can
involve 3/4 levels will be avoided and which can also be built in
negotiations.
f) Wider input tax credit availability e.g. warranty parts, services
related to trading activities, items like furniture, office equipment etc.
currently out of credit chain.
g)Rationalization of procurement decisions due to flexibility arising out
of tax neutrality e.g. decisions on job work, location of vendor no bar,
level of assembly – all decisions can be made based on operating
efficiency alone.
h) Rationalization of vendor base.
i) Tax neutrality will support procurement of higher level assemblies and
consequently more outsourcing if economical.
j)Realignment of production processes even if the units are in two
different States e.g. centralized production of certain components and its
supply to other units if operationally more efficient.
k) Eventually, vendors will also rationalize their processes and
locations to optimize costs.
l)Realignment of distribution chain e.g. with no specific tax benefit to
anyone in effecting sales through depots, depot operations can be
restricted only based on business needs e.g. proximity to customer and
possibilities of more direct sales from factory can be explored. The
concepts like regional depots at central places to cater to dealers in more
than one State due to tax neutrality and have the benefit of existence of
depot at lower cost, bulk transportation by railway or even waterways up
to certain central place for further distribution there from without tax
implication etc. can be put through.
m) Saving in current cost of non-abatement of Excise Duty on post-
sale incentives,
However, the requirement for working capital on inventory at all
stages – in factory, at depots, in transit, at dealerships will go up with
blocking of more funds in taxes in the absence of transactions at
concessional rate like C Form, F Form transactions currently possible.

While the scope for input tax credit is widened, compliance effort
for the same would considerably go up with credit matching concept and
new issues on reconciliation will arise.

IMPACT ON THE STATE INCENTIVE SUBSIDIES ON

CURRENT INVESTMENTS / AREA BASED CENTRAL
EXCISE EXEMPTION IN UTTARAKHAND

Most of large OEMs have made huge investments in particular

States providing special incentives and are currently availing various
package scheme incentives from the respective State governments.
These schemes provide for payment of incentive based on the output
State VAT/CST paid on the sales made from that State net of input tax
credit availed in the particular State. In some cases the refund is
provided for the State taxes paid on the gross basis. Further in some
States there is upfront exemption from payment of sales tax.
 With the advent of GST Regime the entire taxation concept for
goods would be moving from origin based taxation to destination based
consumption tax. Hence an OEM which is having a plant in a State and
is making interstate sale from that plant, under GST Regime it would
pay IGST which would accrue to the receiving State. Under the current
regime the OEM would have paid CST which was collected by the
originating State. Therefore, in GST Regime the concerned State

Government would not be willing to give the subsidy in respect of

the IGST paid on the interstate sale and also in respect of the CGST
component collected in respect of the local sales.

The OEMs have already started representing this issue with the
respective State Governments with suggestions as would protect the
quantum of incentives.

This could be a major impact area for the companies who have
made investment on the assumption that they would get a particular level
of incentive/subsidy and a matter of concern till the issue is satisfactorily
resolved with concerned State Government.

A number of OEMs were attracted to Uttarakhand, substantially

keeping in mind the exemption from Central Excise Duty under the area
based central excise exemption scheme. Since the concept of exemption
is not in tune with the concept of free credit flow in GST, the scheme of
benefit to units in the area would need total revision. There is no clarity
in public domain on how the Central Government proposes to go about.
While some of the OEMs have completed the period of exemption
benefit, few companies are still within the benefit period and decision by
the Central Government would be crucial for them. Besides, for these
OEMs the decisions like product pricing under GST, vendor pricing etc.
would be crucial but very complex.

INPUT TAX CREDIT ON GST TRANSITION STOCK:

This may not normally be a major issue for OEMs at their factories
since purchases are from registered entities and credits will be carried
forward on the basis of returns. However, during transition, ensuring that
credit is timely availed for all receipts will be challenge due to large
volumes and diverse locations, though well set processes exist. The
depots, predominantly in commercial vehicles, will have Excise Invoices
as they receive vehicles from OEM factories. Problem would be
restricted to any vehicles transferred from other depots without Excise
Invoice but the depot registrations and provision introduced for Credit
Transfer Document will help in most such cases.

As far as dealers are concerned, in Cars and two wheelers, where

there are direct sales to dealers, the dealers will have Excise invoices. As
for sales from depots, ,commonly done in commercial vehicles, depot
registrations have been taken by OEMs so that the dealers have excise
invoices and problem is restricted to old stock prior to such arrangement.
The provision introduced for Credit Transfer Document will help here
also in most cases.

The ‘eligible duties’ on which credit is available to traders on

transition do not include Infra-structure cess applicable on Cars. To that
extent, credit will not be available to the dealers on the transition stock
and the same would be a cost.

FINANCE, ACCOUNTING, COSTING, LEGAL

COMPLIANCE, TAX ADMINISTRATION, IT,
TRAINING ETC.

The areas of implication which could be favourable or adverse as

well as the areas which would need lot of effort are:

(a) Overall reduction in cost but working capital requirement likely to go

up. Continuation of quantum of Government incentives can be a concern
for some OEMs.
(b) Current VAT accumulation problem at manufacturing locations
(due to transfers to depots/ CST sales at 2%) will not be there but the
problem may shift to depots and need close monitoring.
(c) Easier compliance in some matters e.g. no Section4A / Rule 10A
valuation, no GAQ computation on stock transfers, lesser classification
issues, no Forms collection, no issue of pre-determined sale etc.
(d) Big challenge of setting up new internal processes, accounting and
IT system to comply with GST provisions in particular with new
concepts like tax on advances received (a common practice in
automobiles), credit matching, taxability of internal services, new
valuation provisions, extension of related person concept & coverage of
employees therein, ITC at depots, concept of composite supply and in
particular its implications in services etc., some of which are very
difficult to implement in OEMs who have complex operations and
organization. Carried forward issues under old laws like assessments,
litigations etc. will simultaneously continue.
(e) Study of cost implication at Vendor end and re-negotiate the
prices. Similarly, study of the cost implications at dealer end and dealer
incentive schemes and re- work compensation and incentive schemes.
Dealer incentives will have to be passed on with invoice reference.
(f) Re- working of product and services pricing.
(g) Extensive training – internal as well as external to Vendors and
Dealers as they become partners in credit chain and any tax optimization
efforts.
(h) Absence of LTU & Centralized Service Tax registration under
GST – major tax administration concern for several companies operating
under the same. Internal monitoring processes will change.
(i)Tax function at States / depots / branches will have to be strengthened
due to State level compliances and changes will be required in internal
monitoring processes.
(j) Compliance of anti-profiteering provisions.
(k) Raising of self- invoicing on all purchases from unregistered
persons. Plain reading and absence of clarification results in all imports
also requiring self- invoicing - compliance efforts.

GST ON PETROLEUM PRODUCTS – A LOST

OPPORTUNITY:

The diesel, petrol and CNG are and can reasonably be expected to
continue for next few years at least to be the main fuel for Motor
Vehicles on Indian roads. They constitute largest part of the cost of
running a Motor Vehicle. As such, any policies concerning them have
bearing on automobile industry. Diesel and petrol are heavily taxed by
both the Centre and the States. Their inclusion in GST and the
consequent benefits to Petroleum companies could rationalize their
prices and also made extension of full GST principles to transport sector
possible. This could possibly have helped Automobile sector in terms of
demand for Motor Vehicles. However, with the decision to defer GST
implementation for petroleum products for the time being, the
automobile industry has lost the opportunity till the policy decision is
made to include petroleum products under GST.

LONG TERM IMPACT ON ITS OWN PRODUCTS?

The tax neutrality because of GST would remove one barrier viz.
tax cost in free movement of goods within country. Government is
seriously pursuing the initiatives to reduce the road transportation time
through improvement of road infrastructure as well as through various
measures to reduce time involved in any procedural issues in transit.
One such initiative being implemented along with GST is E way bill.
Over long term, all these initiatives, if not GST alone, can change
distribution practices in the country, and consequently the goods
transportation practices e.g. shift towards heavier vehicles for long
distance transportation, which may have implication on demands across
segments of goods vehicles.
CHAPTER:-5

ANALYSIS

The 14-year-long journey of Goods and Service tax (GST) finally

culminated on July 1, 2017 with the implementation of the biggest tax
reform of India in 70 years of independence. While the government of
India under the leadership of Prime Minister Narendra Modi hailed the
moment of ‘Good and Simple Taxation System’ for the benefit of
common people, small traders and industry as a whole; the opposition
parties have slammed the establishment for forcing a half-baked GST
regime over the taxpayers.
 The whole issue about the impact of GST on the auto industry
hovers around the compliance of the new taxation system by the sector
as a whole. The outlined benefits of GST on auto industry are primarily
simplifying logistics and constraining the operational and manufacturing
costs, the compliance is something industry is vary about.

In order to reap the benefits of GST you need to take a close look
to ensure the compliance of GST by both the parties you are directly
linked to. Whether you are a business owner or a buyer of a car, scooter
or moped, you need to be equipped to take on the GST ferry. You can
use the support of ASP and GST suvidha providers authorized by the
government to understand the details of compliance and related
concerns.

What started as a Single Nation Single Taxation drive has largely

unified 17 different taxes including various excise duties, octroi, service
tax, VAT, and many more. However a nation of more than a billion
people has ideologue ready to delineate GST as another 17 th tax. The
myth is widespread like a cacophony before the elephant starts to walk.

To brace with the impact of GST Indian Automobile Industry

offered pre GST discounts on cars, scooters and bikes. The discounts
poured in throughout the June as the Auto majors like Maruti Suzuki,
Toyota, Hyundai, Honda and mostly all players announced big rate cuts
in a race to trim their inventory ahead of GST.
 Amidst all the turmoil and apprehensions, July’17 went loudly
ahead than the previous sluggish months and ended with a bang for the
entire industry with Maruti Suzuki, Honda Cars and Ford India grabbing
the podium. While The Maruti Suzuki recorded a staggering domestic
growth of 22.4% in July ’17 as against July’16 Honda Cars too came out
with flying colors with an astounding rise of 21.74%, as compared to
July 2016.

The initial GST ambiguities seem to be settling down and the

festivity ahead will only add ice on the cake. To understand the impact
of GST on the industry as a whole, you need to understand its effect on
various business operations including production, procurement, pricing
and sales strategy.

SIMPLIFICATION OF LOGISTICS WITH INPUT TAX CREDIT

GST has been introduced to subsume the current indirect tax

regime which used to attract several duties and taxes on the sale of
vehicles and spares and accessories. The previous taxation regime
included:

 Central Excise Duty

 Additional Excise Duty
 Infrastructure Cess
 CVD and Additional Import Duty
 VAT on intra State sales
  CST on Interstate sales

Currently, all these resulted in cascading effect and increased the

product price. However, now it is expected that product cost will be
substantially reduced due to seamless input tax credit (ITC) across the
supply chain– from manufacturer, to supplier, to agent, to final buyer all
can claim input credit for tax paid on purchases.

Now the businesses would be able to claim ITC on various

elements across the supply chain like lease rentals, IT services and
freight charges. The bottlenecks related to logistics and transportation of
units from one state to another state would also be wiped off. The
reduced cost will in effect reduce the price and raise the demand and
growth in the sector. The consumer in India is price savvy and
companies never fail to use the event to bring sale and discounts.
Nevertheless, post-GST rollout, Maruti Suzuki, Tata Motors, Toyota,
Nissan and Renault India have also announced the discounts to pass
GST benefit to the end buyer.

REDUCTION IN OPERATING COST

With elimination of CST, companies need not maintain

warehouses and C&F agents at multiple state points. The warehousing
infrastructure could be clubbed and lower the operating costs in the
supply chain. Further with the inclusion of business overheads such as
advertising, business promotion under Input tax credit, the operation cost
would be further reduced.

IMPACT ON WORKING CAPITAL

This would be a huge concern for the dealers as the supply is

taxable in GST. On the date of vehicle transfer, GST would be paid and
it would lock the capital. Now the dealer would be required to pay GST
on the same day as he receives the advance and it will hurt their outflow.
Another cash lock would be when the auto manufacturers would offer
free services/warranties as sales’ benefit to their customers (at the time
of sale of vehicles). They would pre-pay GST on the issue date of the
coupon while customers would be using the service on a later date.

IMPACT ON AUTO VALUATION AFTER GST

The base GST rate has been set at 28% besides a cess (1% to 15%)
on vehicles of different categories and sizes. Together both will impact
the end prices.

LOW IMPACT ON TWO WHEELERS

The impact of GST is marginal on two-wheelers sector as the levy

is 28 % on engines below 350cc and 31% on engine above 350 cc is
31%. Earlier the segment was charged with 30.2 %. Largely the impact
on prices of 81% of market would be broadly unaffected.
HIGH IMPACT ON COMMERCIAL VEHICLES

The commercial vehicle segment comprises commercial vehicles

and three-wheelers. Earlier the segment was paying 12.5 % Excise Duty
+ 1 % NCCD + 12.5 % VAT and 2 % CST which totalled to overall 30.2
% of tax. Herein three-wheelers were excluded of 1% of NCCD. After
GST, the overall impact on the segment is a slight dip of 2.2 % as the
levy is 28%. So, the impact in valuation is again negligible. Similarly,
there would be no change in the prices of tractors. The maximum effect
would be visible on a new category being introduced for minibuses
ferrying up to 13 passengers. Besides the base rate, the passenger vehicle
would invite a 15 % cess on them shooting up the total GST to 43%,
which is a major cause of concern.

LOW IMPACT ON PASSENGER VEHICLES

Small cars (both petrol and diesel variants; engine below 1200 cc)

The economic car section would attract the base rate of 28% GST
along with a cess of 1% and 3% which is smaller than current 31.4% to
33.5%. In effect, the price of this segment would be neutral or reduced
marginally. Bigger sedans and SUVs (1,500cc or more engine size, Over
4,000 mm length and Over 170mm ground clearance). In this segment,
the buyer will enjoy the price cut. The current tax rate was 46.6% to
55.3% which was much higher than the new GST rate of 28 % (+15 %
cess).
REEN VEHICLES UNDER THE PURVIEW OF GST

A 15% cess above the base GST rate of 28% on green vehicles is
questionable as it is far above the existing 30.3% rate. While the
officials have claimed that smaller hybrid vehicles are ruled out from
additional cess of 15%.

DEMO CARS HEAVILY TAXED

GST demands a high tax rate on the demo cars. Currently, these
vehicles were taxed at 0.5% while they are sold in the used car market
after a year or so. With GST, tax rates of 28% and 43% of the sale value
would be levied.

CHAPTER:-6

CONCLUSIONS, REFERENCES
One hundred and twenty second amendment, or popularly known
as the GST is a landmark reform, changing the Indian economy for
good. There are lots of speculations and apprehensions relating to GST,
how will tax credit set off availed, who will levy, which tax and also
how the actual impact of GST will differ on different sectors. This study
aims to study the impact of GST specifically for the real estate and
automobile sector in India.
 In case of real estate, effect of GST on real estate in terms of
outflow for developer & consumer will depend on the final rate of GST.
GST would provide an audit trail for better control and monitoring of the
sector. And in the case of Automobiles sector, it will benefit from the
increase in the economic growth translating into higher consumer
spending for vehicle across categories. Impact of Tax cascading will also
go away that will reduce overall cost of vehicle manufacturing as all
taxes on input paid will be offset with the output liability of GST.
However, the industry would be able to translate all these benefits, given
sufficient lead time for adaptation before the introduction of GST.
The findings of the study are pertinent to industry practitioners,
academicians and policy makers. The study provides a comprehensive
view on the impact of GST on the real estate and automobile sector,
making it easier for adaptation. For the academicians, it is of interest a
change as significant as GST which has economy wide ramifications are
understood properly. Also a clear understanding of GST would help
policy makers gain greater public acceptance and thus easier to migrate
from the old taxation system.
In the future, studies can help understand the impact of GST on
other sectors as well along with ex post impact
analysis of GST on the economy.

REFERENCES
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2. Empowered Committee of Finance Ministers (2009). First
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629.
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