The GST Council has finalised a rate structure of 28 per cent for truck and buses. It is the same as cars, motorcycles, mopeds, personal aircraft and luxury yachts claimed an industry expert. According to an industry source, that smaller buses and vans with a capacity to seat 10 to 13 people will attract 15 per cent cess besides 28 per cent tax. Opining that GST for CVs will be neutral, the source drew attention to three wheelers, which are expected to witness a marginal increase in prices due to the additional National Calamity Contingent Duty (NCCD) levied. Against the current 27.5 per cent (Excise Duty and VAT) tax structure, that the tyres attract under GST they will attract 28 per cent duty, an increase of 0.5 per cent. ICRA in its report has mentioned that the overall tax incidence for the industry will remain neutral. Said Subrata Ray, Senior Group Vice President, ICRA, that the total tax incidence relating to inputs is estimated to increase since GST rate for input components is fixed at 28 per cent, higher than the current taxation structure. However, the manufacturer can claim input at credit. The fixation of GST rate of 12 per cent on tractors would allow OEMs to take credit of the cumulative input duties and taxes. Total tax incidence would thus remain at similar levels, and its implementation for the tractor industry would be neutral. Feared an industry expert that any benefit that the GST may offer will be lost to countervaling duties levied by respective state governments in their pursuit for revenue. He cited the example of Maharashtra, which has levied, not once but twice, countervaling duties on petrol. Countervaling duties may never be reduced or abolished he said, and instead increased over time in one form or the other.
Cab aggregators and buses carrying more than 10 people have escaped cess under GST, claim industry sources. They cite the four bills for the proposed GST regime, which were recently introduced in the lower house of the parliament by finance minister Arun Jaitley. Introduced as money bills, which do not require the nod of the upper house of the parliament, the omission of cab aggregators comes as a surprise to many. It has perhaps to do with the presence of just two major players, Ola and Uber. In the case of buses carrying more than 10 people, the omission from cess is expected to provide some relief. Buses, according to industry experts, currently attract an excise duty of 12.5 per cent and a Value Added Tax (VAT) of 12.5 per cent in most states. Vans carry an excise duty of around 24 per cent and a VAT of 12.5 per cent.
GST, which promises to be an ambitious tax reform, may not ease the compliance burden or improve the ease of doing business claim industry sources. They point at provisions in the final draft of the GST law to get reluctant states on board. Revision of GST orders for three years, permitting officials to check vehicles in transit, levy of up to 2 per cent tax collected at source on e-commerce marketplaces and the requirement of service providers to register in every state, the sources point out, are provisions in the draft law that may not ease the compliance burden or the ease the prospect of doing business after all. Some of the provisions, he claim, were included upon the insistence of states, and despite severe opposition from industry. Many provisions in the draft GST law approved by the GST council may end up increasing compliance burden and bring back inspector raj. Industry sources claim that the GST law retains provisions present in the value added tax (VAT) where-in the taxmen can revise orders for three years. These powers will mean cases drag on for a long time, they add. The provision would also allow tax authorities to check vehicles in transit. Though transporters will be issued one single e-permit electronically by the goods and services tax network, the clause is said to permit vehicle checks at the toll post.
The government is known to have come out with a comprehensive document on taxation rules and procedures for various sectors, including the taxi aggregators under the Goods and Services Tax (GST). Over 500 questions compiled in the form of Frequently Asked Questions (FAQ), the Central Board of Exise and Customs (CBEC) is known to have covered registration, valuation and payment, scope and time of supply, refunds, seizure and arrest among other issues. Accordingly, taxi aggregators such as Ola and Uber will have to register under the GST regime and are claimed to not have been granted any exemption from the prescribed threshold limit. The FAQs based on model GST law could however be changed post a deliberation with the respective state governments.
A report from the global financial services firm HSBC has attempted to put an end to uncertainty surrounding the implementation of Goods and Services Tax (GST). A long awaited tax reform, which is expected to bring about transparency in taxation and simplify the taxation procedure that currently prevail, including some that lead to double taxation, GST, the HSBC report said, could be passed in 2016 and rolled out in 2017. The report credits BJP government for having made changes to make the piece of legislature acceptable to other parties who have opposed it thus far.
By the time of going to press the Goods and Services Tax (GST) bill had yet to find favour with a majority of lawmakers in the country. After being discussed for almost a decade, the bill continues to be in front of a parliamentary committee. Claimed to have far-reaching economic consequences, and pan-India, the bill has attracted an eight-point dissent note from the Congress faction of the opposition. Those who are aware of this development mentioned that the note calls for a simple and comprehensive GST. Claiming that the Constitution (122nd) Amendments Bill 2015 is neither, the note mentions that the bill is pitted with compromises, exclusions and exceptions. Through the note, claim sources, the Congress has demanded an 18 per cent ceiling so that in pursuit of higher revenues the GST council would desist from crossing the ceiling. The dissent note also stresses upon scrapping the proposal to levy an additional one per cent tax. Mentioning it as market distorting, and especially in view of the fact that it had proposed 100 per cent compensation to be deposited in a fund under the administrative control of the GST council, the Congress, in its dissent note, has also claimed that tobacco and tobacco products, alcohol for human consumption and electricity supply and consumption should be included. Emphasising that the GST council is unduly weighted in favour of the Centre, the dissent note, in the interest of true cooperative federalism, has called for 75 per cent share of votes in the GST council by states, and 25 per cent by the Centre. Stating that the absence of GST disputes settlement authority was a lacuna, the dissent note called for safeguarding of revenue sources of the panchayats and municipalities.
GST and the states
If the Congress’s dissent note was to be delved upon, there’s a possibility to reach an opinion that it is the centre, which is pushing the bill rather than the states being equally keen. The same may not be true. The fact however is that the bill is yet to find favour with majority of the lawmakers in the country. The Congress’ dissent note apart, a debate is already on about the effect of GST on ‘consuming’ states and ‘producing’ states. Some experts are of the opinion that GST implementation would see the revenues of ‘producing’ states fall. A fundamental flaw in the bill, they point out, is the one per cent additional tax that has been granted for a period of two years to placate with the ‘producing’ states. While some go to the extent of terming the current nature of the bill as the one that will only cause pain for the next two years at least, there are those who feel that the proposal to levy one per cent additional tax fails in logic. Since states are to be compensated, what is the need for one per cent additional tax, they question. The possibility of one per cent additional tax extending beyond two years is also there. Experts mention that the GST council can extend this period with the finance minister having no veto power.
With the central government seeming to be more assertive about GST’s implementation, it has to be taken into account that it is a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services that will touch every state, every district, every tehsil and every individual. GST will not just replace all indirect taxes levied on goods and services by the Indian central and state governments, it will also be a comprehensive Value Added Tax (VAT) on goods and services, levied and collected on value addition at each stage of sale or purchase of goods or supply of services based on input tax credit method without state boundaries. Experts emphasise that no distinction will be made between taxable goods and taxable services. They will be taxed at a single rate in a supply chain of goods and services until the goods or services reach the consumer.
GST will unleash biggest tax reform
Claiming that GST will lead to one of the biggest taxation reforms in the country, experts state that the likely result would be the reduction of cost of doing business. Cascading effects of taxes will be eliminated. This will especially benefit automotive distributors, which attract high rates of CENVAT duties as well as VAT at the state level, in addition to other levies such as NCCD, Auto cess, entry taxes, octroi, registration charges and road taxes. Commenting on GST, Erich Nesselhauf, CEO, Daimler India Commercial Vehicle (DICV), said that its implementation will be interesting. According to Sarika Goel, Associate Director – Tax & Regulatory Services, Ernst & Young, automotive exports are also likely to benefit from the implementation of GST as embedded taxes in India’s export prices will be eliminated.
Ease of inter-state movement, other benefits
Likely to mark the elimination of embedded tax costs on inter-state movement of goods (CST or entry taxes), and a shift in the point of taxation to the consumer ultimately, industry sources claim that businesses would have greater flexibility to re-design their supply chains and optimise logistics costs. They add that vendors are also likely to benefit from the transition, and OEMs could negotiate with their vendors to pass on those benefits in terms of input prices. Eliminating multiple tax structure at central and state levels would make the sector viable and globally competitive.
Helping auto suppliers to consolidate
Currently, auto component manufacturers set up units close to OEM plants to avoid breaking the VAT credit chain. Experts explain that the removal of Central Sales Tax (CST) in the regime would provide a new opportunity for consolidation of these units into larger units, which would elevate the economic efficiency of the sector as a whole. Importers, distributors and domestic resellers should be able to claim credit of GST paid on all business procurements of goods and services, as opposed to the current scenario, where they cannot claim a credit for the duties or taxes paid on capital assets and input services availed. This free flow of credits across the supply chain should work well for all business-to-business (B2B) players, and result in increased profitability, claim experts. Defining the effect of GST, Dr Surinder Kapur, Chairman, Sona Group, is known to have said that the implementation of GST will add 1.5 to 2 per cent to the GDP growth rate. Helping to broaden the tax base, and ensure a more stable flow of revenues, GST, experts claim, could assist the country in achieving the gross domestic product (GDP) growth target.
Need for special transition provisions
A common practice in the auto industry is to sell vehicles through a dealer network. More than 80 per cent of the sales is often outside the state of manufacture. The distribution of the vehicles could be by way of direct sales to dealers. This is subject to CST, or by stock transfers to depots and stockyards across the country. Both these models entail a tax cost. The tax cost gets embedded in the final price of the automobile. Though the rate of CST cannot be set off by the dealer against his VAT liability, state VAT laws provide for retention or reduction of input tax credits even though stock transfers are not eligible to tax. Stock transfers as of current do not attract any tax (other than the loss of input tax credit in the exporting state). It is possible that GST would be applicable on all ‘supplies’ including stock transfers. This would have its own challenges. The valuation of such stock transfers will need to be tackled as there would be no sale value available to calculate tax. There could be significant cash flow issues as well. Special transition provisions will be required for the movement of stock from the factory to a depot (or dealer warehouse) on the date of introduction of GST.
In an interview to a business newspaper in 2014, Ravi Pisharody, Executive Director—Commercial Vehicles, Tata Motors, is known to have said that in the absence of GST they end up having 25 to 28 stock points in different states. Since the ticket size of Ace is low, the company is doing direct billing all over the country from the Pantnagar plant. Pisharody is also known to have mentioned that they are absorbing two per cent CST, and this amounts to Rs 40,000 in case of a heavy commercial vehicle that costs in excess of Rs. 20 lakh. The implementation of GST would help with direct billing to all the customers from the plant. Thus, the need for many warehouses would be gone, reducing the logistics cost as well. For buyers, the amount of documentation to prove that they pay the relevant taxes will be simpler.
In its list of suggestions, the Society of Indian Automobile Manufacturers (SIAM) has called for the inclusion of road tax (motor vehicle tax) in GST. It has also demanded that no additional tax should be introduced or levied after introducing GST. Any change, if required, should be done by modifying the rate of taxation under the GST regime, and not through additional levies or taxes. SIAM has also mentioned that used vehicle trade should be brought under the gamut of GST too. Some of the other suggestions include uniform rate of tax on complete vehicles and inputs, against which input credit should be allowed. Tax paid on complete vehicles on movement from factory should be made available as input credits to the vehicle dealers. Tax rates should be uniform across states, and there should be one authority to which payment would be made of one challan. A common base should be adopted for taxation of both, central and state GST. The document based credit should be dispensed with. Fuel should be brought under GST with input tax credit and a mechanism to avail the same. There should be no distinction between input and capital goods. Appropriate provisions should be introduced to ensure continuity of existing benefits. GST Act should be common to all the states. State specific incentives should be protected under GST.
It will be interesting to see when and how GST is implemented. As of current, the implementation of GST in the next financial year (as announced by the finance minister Arun Jaitley in his budget speech) looks difficult. Impossible almost. The eight-point dissent note of Congress assumes importance at this juncture. The issues highlighted by the dissent note will need to be looked into. There is no doubt that the need is for a simple and comprehensive GST. However, for the same, the need is for the centre and states to actively collaborate; take hard decisions if the need be. Capable of inducing far reaching economic reforms, GST has got everyone in the country looking up to it with trepidation as well as with interest. The need for GST is to pave the way for transparency and a fair taxation policy, which would lead to a robust growth. In the CV industry, Medium & Heavy Commercial Vehicles (M&HCVs) continue to grow on a small base, with replacement induced demand mainly from cargo. Some bus segments have shown fair growth lately. In such a scenario, the need is for a GST that is not just simple and comprehensive but also a tax regime that will set the tone for the industry’s brighter future.