Despite the obstacles of implementing such a large change in the form of GST, this industry has always welcomed and supported the notion of value-added taxation, on which GST is based, in the hope of having clear and sensible taxation.
Originally published on 15th July by Rajat Mohan. The Author is a Senior Partner with AMRG & Associates
In April-March 2020, the Indian automotive sector has produced 26 million vehicles, including passenger vehicles, commercial vehicles, three-wheelers, two-wheelers, and quadricycles, of which 4.7 million have been exported. This manufacturing industry is also one of the most important sources of employment in India, employing millions of people. As a result, the significance of the same cannot be overlooked.
Despite the obstacles of implementing such a large change in the form of GST, this industry has always welcomed and supported the notion of value-added taxation, on which GST is based, in the hope of having clear and sensible taxation. Per se GST has a simple tax structure and reasonable tax rates on an overall basis. But like all other industries, this sector also has concerns areas that need to be addressed—discussing some of them one by one.
Classification of Goods
While many auto parts and components are designed for specific uses, there may be more than one method to use them in entirely different ways. While experiencing a motor vehicle as a single unit is nothing short of a miracle, this manufacturing wonder is nothing more than an amalgamation of lakhs of parts, spares, components, and accessories that are artistically constructed and coupled in such a way that they work in synchronization with each other. This raises the question of whether all such parts and child components should always be categorized as vehicle parts under heading 8708 or whether they should be categorized based on their independent elements and utility being taxable at the corresponding rate of tax.
The Department of Revenue is contesting the taxpayer’s classification of automobile components and accessories. It is essential to note that the tax rate is 28 percent if the product is categorized as parts of a vehicle, and 18 percent if the product is classified based on its attributes. Now, to determine the proper classification of these items used in motor vehicles, it is necessary to consult the CBIC’s tariff classification, as well as its Schedules, as well as the Interpretative rules, Section Notes, and Chapter Notes, as well as the World Customs Council’s explanatory notes to the HSN. It’s worth mentioning that various advance rulings on the classification of automobile components have been issued under the GST regime, which has added fire to the running debate.
Under the current Indirect Tax scheme, the classification of components and accessories for motor vehicles has always been a point of contention. According to the review of relevant GST judgments, the matter is not as simple as classifying all items under Heading 8708 without considering the nature of the goods or the correct legal position. As a preliminary to litigation on this matter, revenue has begun collecting information from automobile OEMs.
Industry players have two possibilities. Firstly, they can use the highest rate on a conservative basis, which would eventually increase the ultimate customer’s price. Secondly, they can obtain an early judgment on classification in such circumstances. However, this is one area where precise clarifications from the department are much awaited.
ITC on Motor Vehicles
Generally speaking, passenger-carrying Motor vehicles are not eligible for credit under the GST Law. However, credit is eligible if the taxpayer is involved in buying and sale of Motor vehicles or utilizes them for training, such as for driving or flying school. Thereby a massive chunk of vehicles used in millions of businesses in India leads to cascading effects of taxes. In today’s era of transportation, every business, big small, has a fleet of motor vehicles for transportation of employees, directors, vendors, clients, or other stakeholders.
Thereby Indian policy-makers should allow ITC on GST paid by taxpayers on automobiles used for business purposes. This permission will practically make the motor vehicles cheaper by at least 28% to a business entity, which will push the demand.
Electronic Vehicles (EVs)
All-electric vehicles are currently subject to a lower GST rate of 5 percent, which is almost 6 to 8 times lower than that of petrol and diesel vehicles. Apart from the relaxation in GST Law, a deduction for interest payments up to Rs. 1,50,000 is available under Section 80EEB of the Income Tax act as well. An individual taxpayer having an electric vehicle for personal use or business use, in either case, is entitled to the tax benefit. This deduction would make it easier for people who own an electric vehicle to deduct the interest they had paid on their loan.
In India, electric cars are still not as affordable as they are in many developed countries. To help this, the Indian government has been gradually adopting steps to encourage the adoption of electric vehicles in the country by providing different subsidies and incentives to both manufacturers and car customers. To enhance the subsidy for electric two-wheelers, the government has partially amended the FAME-II (Faster Adoption and Manufacturing of Electric Vehicles – Second Phase) scheme. The demand incentive for electric two-wheelers has been enhanced by 50 percent to Rs 15,000 per KWh, up from the previous standard subsidy of Rs 10,000 per KWh for all EV and hybrid vehicles, except buses.
However, the government continues to tax lead-acid batteries at 28 percent and lithium-ion batteries at 18 percent resulting in an improper inverted duty structure for producers. The government should also take initiative to lower the cost of batteries by reducing the tax rates on the same and temporarily allow imports of additional EV components such as motors and drives while promoting investment for indigenous R&D and entrepreneurs in the field of electric aerial mobility at zero taxes.
The implementation of GST has had a positive influence on the vehicle industry. Despite some restrictions in working capital, the elimination of the cascading effect of taxes, the continuous flow of credit, and the reduction in the number of taxes have had a favorable overall influence on the industry and also has made the taxation system less complicated than before. Apart from few issues listed in this article and the area of concerns which OEM’s have been representing to the Government and positive response thereon will help the growth of the sector and strengthen its position and contribution to the economy.
Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.