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India has a diverse automotive industry that includes two- to four-wheelers, as well as commercial vehicles. There is also a steady progress towards electrification. India is the largest automobile manufacturer in the world, with the largest number of three-wheelers, two-wheelers, and tractors.

The Indian automobile industry is therefore a major contributor to the Indian economy. There were many taxes in the past, including sales tax and road tax, sector tax as well as VAT, motor vehicle tax and registration duty. Previously, various taxes such as sales tax, road tax and VAT were in effect. They have been merged under GST (Goods and Services Tax). We will examine the effects of GST on the automobile industry and the GST rates for Automobiles in this article.

GST has positive impacts on the sector

GST's introduction has had positive effects on the automotive sector. The ex-taxation system meant that dealers couldn't claim credit for Excise duty, CST and other cess paid before, which inflated the purchase price. The GST regime will allow dealers to claim the credit for any CGST, SGST, or State Goods and Services Tax that they have paid. This will ensure that the vehicle's purchase price will not increase. The GST eliminates the cascading effect and lowers the cost of automobiles.

The previous regime saw automobile components, accessories, and component manufacturers charge excise duty based on MRP value abatement. This meant that the duty portion would be paid for the value greater than the transaction value. This resulted in higher excise costs on spare parts and accessories purchased by dealers. This concept has been dropped in GST.

Another advantage of "One Nation, One Tax" are the uniform tax rates across the country. This means that consumers no longer have to pay tax arbitrages at the state level. This has resulted in a decrease in tax evasion due to consumers purchasing vehicles from states other than their home state. Car dealers used to open showrooms for delivery in lower-tax states, while sales showrooms were always available at the point where they sold. Practically speaking, dual showrooms have lost their appeal since GST was implemented. This led to the sector merging the point-of-sales and delivery showrooms.

Impact of GST on Automobile Industry

Prior to 1st July 2017, Central Sales Tax was levied on interstate sales. Credit for that tax could not be claimed to pay output VAT. This problem is over with IGST now being applicable to interstate sales of goods and services. Credit is readily available. Eliminating CST resulted in a huge cost savings. Input tax credit can also be claimed for overheads like rent, promotion, and advertisement. The sector can now claim the input tax credit on various operating overheads such as rent, promotion, and advertisement. This helped to reduce operating costs.

GST provides a significant relief because the law allows for the exclusion from transaction value of any subsidy provided by the Central Government or the State Government. The government provides huge subsidies to electric vehicle manufacturers. This will allow them to save huge tax costs, which in turn would be passed on the consumers. If any electric vehicle is subject to a government subsidy then GST will be applied on the transaction value, minus the subsidy amount. This provision is clearly defined in the GST law, and it has the effect of removing any ambiguities.

GST has negative impacts on the sector

GST also applies to vouchers and warranty cards that are issued to customers as part of after-sales service. GST must be paid at time of issue of vouchers or warranties cards. It covers the money value of goods and services, or both redeemable for the vouchers/warranty cards. Therefore, the working capital up to the tax limit would be blocked at issue of the vouchers or warranty cards even though they can be redeemed at a later date.

GST excludes discounts from the supply value if they are in the invoice or as a result of an agreement that was made either before or after supply. It is common for manufacturers/importers to offer post-sales discounts to dealers, while dealers may also offer promotions to customers. These discounts are seasonal and not tied to specific invoices. This would create significant problems in taxation.

Automobile dealers and manufacturers must charge a fee for selling vehicles and any ancillary services, such as insurance and accessories. The future will be difficult in taxing these supplies, as there are different tax treatment for mixed and composite supply. This area could be a subject of litigation, since the GST policy wing has not yet clarified the situation for the automobile industry or its various sales packages.

GST Rates for Automobiles

GST will benefit the people on the market Small family cars Like Alto, Santro and Nano, Datsun, Go as a Minimum cess of 1 % and GST rate 18% has been applied to the amount of GST charged.

Scooters and other bikes with engine capacity Between 150cc and 180cc Attract GST 18% plus a cess of 3 %Bikes with an engine of More than 350CC GST would be charged on items such as Harley Davidson or Enfield 500CC. etc would be charged GST at the rate of 28% and an additional 17% cess would be levied.

It is easy to understand. Yachts, aircraft and personal jets are eligible for a GST of 28% and 3% instead of the 15% cess bracket.

Due to the competitive nature in the industry, there are many free services/warranties that car manufacturers offer. These services/goods are not subject to tax under the previous tax laws. GST would tax the free services/warranties.

Tabular Presentation of GST & Cess rates on Automobiles

S.no.

Description of the motor vehicle

GST Rate

Cess

1.

Motor vehicles for the transport of not more than 13 persons, including the driver

-

15%

2.

Motor vehicles, excluding ambulances, three-wheelers and vehicles of engine capacity not exceeding 1200cc and of length not exceeding 4000 mm, with both spark-ignition internal combustion reciprocating piston engine and electric motor as motors for propulsion or with with both compression-ignition internal combustion piston engine [diesel-or semi diesel] and electric motor as motors for propulsion

-

15%

3.

Petrol, liquefied petroleum gas (LPG) or compressed natural gas (CNG) driven motor vehicles of engine capacity not exceeding 1200cc and of length not exceeding 4000mm.

18%

1%

4.

Diesel driven motor vehicles of engine capacity not exceeding 1500cc and of length not exceeding 4000mm.

18%

3%

5.

Motor vehicles of engine capacity over 1500cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles.

-

22%

6.

Motor vehicles of engine capacity not exceeding 1500 cc

-

17%

7.

Goods transport vehicle (other than refrigerated)

28%

-

8.

Motor cars and other motor vehicles mainly designed for the passenger transport, apart from those mentioned above, including station wagons and racing cars, leaving out cars for physically handicapped persons

28%

-

9.

Motor vehicles of engine capacity exceeding 1500 cc other than motor vehicles specified against entry at S. No 52B

-

20%

10.

Motor vehicles to transport ten or more persons, including the driver, apart from buses used for public transport, which exclusively run on Biofuels

28%

-

11.

Refrigerated motor vehicles

18%

-

12.

Special purpose motor vehicles

18%

-

13.

All old and used motor vehicles, electric vehicles, vehicles cleared as ambulances

-

NIL

 

Impact of Electric Vehicles on Automobile Sector

India's electric vehicle industry is growing. There are a number of incentives and schemes that the central and state governments have introduced to encourage electric mobility. Some regulations and standards are also in effect. Although the country can see significant benefits by switching from Internal-combustion engine to electric motors, there are still challenges such as a lack of charging infrastructure, high initial costs, and a lack of electricity from renewable energy. However, the sector is gaining momentum with the entry of e-commerce, car manufacturers, mobile transportation network companies and mobility solutions providers.

 

These are the three major expectations for the EV industry:

  • Reduce GST and Import Duty
  • Awareness and financing of EVs
  • FAME (Faster Adoption and manufacturing of electric vehicles in India) II Reforms

However, it is not all doom and gloom for EVs. The industry continues to be on an upward trajectory. The recent industry developments show that consumer demand is the best. Tesla, the world's largest electric vehicle manufacturer, is all set to launch its vehicles in India this year.

Conclusion

The introduction of GST had a positive effect on the automotive industry. Although there were some issues with working capital, overall the impact on the automotive industry was positive. Industry has seen a reduction in taxes, incessant flow credit, and elimination of their cascading effects. Covid-19 however had a severe impact on this sector.

The temporary drop in consumer demand caused by the COVID -19 pandemic resulted in a shift away from luxuries to a more sustainable consumer preference. Companies will need to make strategic choices as their manufacturing capacity increases. Tax credit will be created by the accumulation of unsold inventory, which would reduce GST contributions to government. The government wouldn't like to rationalize taxes rates which could increase demand.

Domestic automobile sales increased at 1.29% CAGR from FY16 to FY20, with 21.55 Million vehicles sold in FY20. In April 2021, the production of passenger cars, three-wheelers, and two-wheelers reached 1,875,698 units.

However, strong growth will be seen in the financial years 2021-2022 due to the rise in income of the middle class and increased young population. India could lead in shared mobility by 2030 and offer opportunities for autonomous and electric vehicles.

People start to use personal vehicles rather than public transport in this pandemic situation. Metro ridership dropped from 37% to 16% within six months of the lockdown. However, the share of cars and two-wheelers rose from 28 to 38 percent.

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