The automobile industry of India is 4th largest in the world, as of 2019. It is a vast business producing a large number of cars, bikes and other automobiles annually. The industry is fueled by the world's second-largest population in the world. Goods and services tax (GST), in 2017 subsumed all other indirect taxes and is applicable on the automobile industry as well.
Earlier, we had a series of indirect taxes, while additionally every state had its own indirect tax structure. Various taxes levied on automobiles before GST included sales tax, VAT, road tax, motor vehicle tax, sector tax etc are all subsumed into one GST. The automobile manufacturers will now have to pay reduced taxes and ultimately consumers will be benefited due to this reduced tax.
Previously, excise and VAT were levied on the end consumer of cars and bikes with an average combined rate between 26.50% to 44% which is higher than that of GST which is between 18% and 28%..
OEMs/importers can also claim GST return on tax charged on import of goods unlike earlier when they were not eligible to claim the excise duty and VAT paid. The improved supply chain mechanism of GST has also helped the automobile manufacturers in procuring parts are a comparatively cheaper rate.
GST on cars and bikes is kept below the 28% bracket and cess, as declared by the government of India which ranges from 1% to 15% Under the GST regime, a minimum cess of 1%, will be charged above the GST rate of 28% on small cars such as Maruti Suzuki Alto, Datsun Ready Go, Hyundai Santro, etc. Interestingly, super expensive yachts, personal jets, aircraft that have engine capacity of more than 1500cc are also kept under the bracket of 3% along with these small cars with engine capacity of less than 1200cc. Luxury bikes with an engine capacity greater than 350cc such as Enfield 500cc and or a Harley Davidson come under the GST rate of 28% along with an additional 3% cess.
GST on automobiles
GST is charged at a fixed rate of 28% on all cars and an additional cess of 1%, 3%, 15%, 17%, 20% and 22% is charged based on the automobile and the segment to which it belongs.
Two-wheeler
GST rate on Bikes with an engine capacity below 350cc are charged at a rate of 28% without cess while those with engine capacity above 350cc are charged at a rate of 31% i.e. (28% GST + 3% Cess).
Small Cars
Small cars are charged at a rate of 29% i.e. (28% GST + 1% Cess).
Hybrid Cars
Hybrid cars are highly affected as the earlier rate was 30.3% but now the rate of GST is 28% + 15% cess.
Luxury Cars
In terms of luxury cars, the rate of tax has been reduced to 42-45% i.e. (28% GST + 15% Cess) from earlier rate of 50%.
Commercial Vehicles
Commercial vehicles are mostly charged at a rate of 15%. However, mini buses are still charged at a rate of 43% i.e. (28% GST + 15% Cess).
Spare parts
The biggest change is seen in spare parts which were earlier charged at a rate of 12% and are now charged at 28% while are taxed at 18% without cess applicable.
Effects of GST
Reduced operational cost
With removal of central state tax (CST) from the interstate sales, the manufacturers are no longer required to maintain different warehouses in different states. Subsequently, promotions, advertisements and other overhead costs are included in the input tax credit. This has reduced their operational cost.
Effect in working capital
Even after three years of implementation, GST is still a hard nut to crack for many. Why are we saying this? Even after reducing the operation cost, GST is cleared and capital is locked whenever an automobile is transferred. This is due to the fact that the supply is taxable with GST. Now, the dealer is required to pay the GST on that very day as the reception advances. This makes dealers avoid hurting their outflow.
The cash lock on free services provided by the manufacturers to their customers will also be affected. Free services are a common part of customer benefits provided by the company in the form of parts, warranty or service. In such a situation, the dealers are required to pay the GST at the time of issuing such benefits, however, customers may redeem these benefits any time.
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