The automobile sector is one of the most important and fastest-growing industries contributing significantly to the Indian economy. Any reforms and initiatives made by the Indian Govt. has direct implications on the automobile sector and eventually on the end-users.
The outburst of the Covid pandemic in 2019 brought about massive changes all around the world and the Indian automobile sector is no exception to it. The pandemic has resulted in a short-term decrease in consumer demand which has shifted the consumer preferences away from luxury vehicles considering the financial crunches all across the world.
In this blog, we will have a broad look at the impact of GST on the automobile sector in a post-pandemic world.
Impact of GST on the Automobile Sector in a Post-pandemic World
India’s automotive industry is diversified, encompassing two-wheelers, four-wheelers, and commercial vehicles, with electrification growing at a steady pace. With Maruti Suzuki, Tata Motors, Bajaj Auto, and Ashok Leyland as the primary participants, India is the world’s largest manufacturer of two-wheelers, three-wheelers, and tractors. The effect of GST on the automobile industry is quite significant.
The automobile industry is one of the significant contributors to the Indian GDP and economy at large. The impact of GST on the automobile sector since its implementation has been profound bringing out major shifts in the purchasing pattern of the buyers.
Different taxes existed previously, such as sales tax, road tax, sector tax, VAT, motor vehicle tax, registration charge, and so on, but they have now been absorbed by GST. In comparison to the former Excise and VAT tax rates, the impact of GST on the vehicle sector has significantly lowered the burden on end-users. The earlier taxes were very higher as compared to the current GST slabs of 18% and 28%.
Now let’s check out the automobile sector to have a better look at the positive impact of GST on it.
Also Read, Impact of GST in Agriculture Sector
Positive Impact of GST on the Automobile Sector
- The Goods and Services Tax (GST) has had a huge influence on India’s automobile industry since its inception. Prior to the implementation of the GST, dealers were unable to claim credit for excise duty, CST, and other cess, resulting in an increase in the overall cost of automobiles.
- In the GST system, CGST (Central GST), SGST (State GST), and IGST (Integrated GST) paid are entirely accessible as a credit to dealers engaged in the future supply of automobiles, and hence will not be added to the vehicle’s purchase price. The impact of GST on the automobile sector has prevented the cascading impact of taxes resulting in lowering the automotive prices.
- Another benefit of the GST for the vehicle business is that tax rates are now consistent across the country. As a result, consumer tax arbitrage at the state level is no longer possible. As a result, there have been fewer cases of tax evasion caused by consumers purchasing chevaliers from states other than their own. Previously, automobile dealers would open delivery showrooms in lower-tax regions, whereas sales showrooms were open at the point of sale. With the implementation of GST, the requirement of multiple showrooms lost its allure, prompting the industry to integrate delivery and point-of-sale showrooms.
- The law allows for the elimination of central government and state government subsidies from the transaction value, which is a considerable relief under GST. As a result, electric vehicle manufacturers, who receive significant government subsidies, will save a lot of money on taxes that will be passed on to customers. As a result, if an electric vehicle receives a government subsidy, GST will be applied to the transaction value minus the subsidy amount. This clause is established in GST legislation in explicit and unequivocal language, which aids in the resolution of each interpretation difficulties and demonstrates the significant impact of GST on the vehicle industry.
Negative Impact of GST on the Automobile Sector
Let us now discuss the negative impact of GST on the automobile sector in India.
- Customers who get coupons or warranty cards as part of after-sales services are subject to GST. When distributing vouchers or warranty cards redeemable against the value of goods and services, GST must be paid. Even though the vouchers can be redeemed at a later date, working capital to the level of tax is locked at the moment of issue.
- Automotive dealers and manufacturers are required under the GST regime to collect a fee for the sale of a car as well as other ancillary services such as insurance and accessories. Given the different tax treatment for composite and mixed goods, taxation of these supplies would be a significant challenge in the future. The GST policy wing has yet to provide an explanation for the automobile sector and its various selling packages, which could lead to future litigation.
- Discounts are only exempted from GST if they are included in the invoice or granted as a result of an agreement established either before or at the time of supply. It is common practice in the automobile business for manufacturers/importers to provide post-sales discounts to dealers, while dealers frequently provide consumer marketing plans. These reductions are only available during the holiday season and are not tied to specific invoices. As a result, significant issues would arise during taxes which has a high impact of GST on the automobile sector.