GST Road for the auto industry looks brighter

GST – Road for the auto industry looks brighter

Despite the bottlenecks, over the last few years, India has managed to establish itself as one of the favoured destinations for automotive manufacturing by leading global players. Alongside, it has also developed its own set of indigenous automotive and component manufacturers, resulting in significant employment generation and economic development.

However, the present Indian indirect taxation structure has resulted in manifold administration and compliance requirements for the manufacturers/ dealers in the auto sector having operations based across the states. Currently, the Centre is levying customs duty on import of goods, central excise duty on manufacture of goods and service tax on services provided/ received while, the states levy CST/ VAT on sale of goods. There are other levies (either as part of duty structure or stand alone) such as entry tax, octroi, automobile cess, National Contingent Calamity Duty, Education Cess and Secondary and Higher Secondary Education Cess that increase the complexity and multiplicity of tax compliance.

The introduction of Goods and Service Tax (GST) from 1 April 2010 promises to bring about a significant change in the present indirect tax structure in India. Taxes such as Central Excise, Additional duty of customs, Service tax, Central sales tax, VAT, Octroi and Entry tax are proposed to be subsumed into the GST. This could witness not only a change in the duty structure with possible reduction in the overall tax cost on the sector but, would also lead to simplification and reduction in compliance requirements.

Unlike many countries which have a unified GST system, a dual GST is being proposed in India wherein the Central government and the State government will legislate, levy and administer a concurrent GST.  Therefore, unlike the present tax structure, GST would be collected on the value added on goods and services at each stage of the supply chain, with a corresponding tax credit mechanism. In simple terms, GST can be understood as a consumption-based tax with the consumer being the last node in the supply chain to bear the tax and input credit/ offset being eligible at prior stages to eliminate the cascading effect of taxes.  

The proposed GST should be a welcome change as it is likely to address some of the issues being faced by the auto industry in India, such as differential duty rates given to luxury cars, small cars, trucks and other products in the excise tariff. The overall excise duty structure itself is complex with multiple duties such as automobile cess, National Contingent Calamity Duty, Education Cess and Secondary and Higher Secondary Education Cess being levied simultaneously. For imports, besides the basic customs duty, Additional Customs Duty equivalent to the duty of excise (with the present complex structure) and Special Additional Customs Duty of four percent is levied. Various states also provide for entry tax on entry of motor vehicles in their jurisdiction.

Interpretation Disputes

Presently, the products manufactured by the automobile sector are separately classified in the excise tariff and are taxed at various rates leading to interpretation and classification disputes. Further, there are disputes over availability of CENVAT credit on input services like group insurance, canteen services and freight paid on outward transportation. GST could largely address such issues currently faced by the industry.
GST could bring relief as it is likely to reduce the multiple rates into a single rate of tax at each stage of the supply chain. Discussions are currently on-going to determine the ideal rate of GST, and the same is expected to range between 14 to 20 percent. The rate