Accelerating GST reforms: Need of the hour for auto sector
Associate Director - Tax & Regulatory Services, EY
The pre-budget announcement made by the FM to extend benefit of reduced excise duty on automobiles till 31 December 2014, is a welcome move. However, the industry is almost unanimous in its view that the most keenly awaited budget announcement is a clear roadmap for nation-wide implementation of Goods and Services Tax (GST).
Touted as one of the biggest taxation reforms in India, the GST a comprehensive value-added tax that will be levied concurrently by the Centre and the states in the form of a Central GST and State GST will replace almost all key indirect taxes (like Central excise, Service tax, VAT and Sales tax) barring customs duty and some local levies, on all transactions in goods and services be it sale of goods or services or even stock transfers.
GST is expected to result in a reduction in the cost of doing business by removing the cascading effect of taxes especially for automotive distributors, which attracts high rates of CENVAT duties as well as VAT at State level, in addition to other levies such as NCCD, Auto cess, entry taxes, octroi, registration charges and road taxes. Automobile exports are also likely to benefit, as embedded taxes in Indias export prices will be eliminated.
Under the GST regime, with no 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, businesses would have greater flexibility to re-design their supply chains and thus, optimize logistics costs. Since their vendors are also likely to benefit from the transition, companies could negotiate with their vendors to pass on those benefits in terms of input prices.
Under GST, importer-distributors as well as 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/ 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.
Currently, a three-tier GST rate structure is proposed 12% for essential goods, 16% for services and 20% for goods, which could result in double-digit reduction in tax costs for the mid-size and luxury passenger vehicle segments especially. Such benefit could be useful for manufacturers to either improve profitability or increase competitiveness by passing on the benefit to consumers in form of price reductions.
Businesses are also likely to derive the benefits of ease of tax compliances and administration and reduced litigation under a simplified GST regime.
Significant progress has been made on the introduction of GST in the last 5 years, including the issuance of a White Paper and the First Discussion Paper by the Empowered Committee; reduction of CST from 4% to 2%; partial alignment of tax credits on goods and services under CENVAT Credit Rules; introduction of Negative list based taxation of services and Point of Taxation rules; creation of IT platform for processing of transactions & returns and introduction of the Constitutional Amendment Bill in the Parliament in March 2011.
However, there are still certain roadblocks which need to be cleared for expeditious implementation of GST such as gaining the States consensus on key aspects such as rates, classification, threshold limits, exemptions etc. in order to achieve a smooth transition to GST.
Further, the Government needs to relook at the exclusion of levies such as stamp duty or octroi/ cess from the proposed GST model, since due to such exclusion, the cascading impact of taxes for businesses is not fully eliminated.
Also, there are various aspects which need clarity in order for the auto industry to be better prepared for the GST regime some key issues being treatment of ongoing area based exemption schemes (from Central Excise perspective) and the State level incentives in form of subsidy or deferment; continuation of end use based exemptions (e.g. for vehicles used as taxis or ambulances) and the continuation of export incentives linked to indirect taxes.
These are only some examples and there would be many similar challenges arising due to interpretational and transitory issues.
The government needs to urgently address all these issues well within time. This will give the corporate world adequate time to efficiently align its operations with the GST regime and make a smooth transition.
Views expressed are personal.