GST Impact on cost of production and distribution (Automobile Sector)

GST Impact on cost of production and distribution (Automobile Sector). The automobile industry has its own complexity-longer investment cycle, development of vendors etc. Automobile Dealer is the key stakeholder who will have large & positive impact.

GST Impact on cost of production and distribution:

(a) Major positive is reduction in costs ( though some of these benefits have to be passed on to customers in terms of anti-profiteering provisions), mainly on account of the following:

  • 1. Saving of 2% CST on inter – state procurement.
  • 2. Saving on VAT surrender where sales to customers in other states are routed through depots – mainly commercial vehicles – as well as on transfers of semifinished goods to other factories in different states – 4% or even more of corresponding purchases within State.
  • 3. Saving in octroi / LBT/ Entry Taxes without credit on procurement.
  • 4. Input Tax Credit on outward transportation – net benefit for commercial vehicles sold through depots.
  • 5. Vendor price reductions for corresponding benefits in supply chain.
  • 6. Wider Input Tax Credit availability e.g. warranty parts, services related to trading activities, items like furniture earlier out of credit chain.
  • 7. Saving in cost of non-abatement of Central Excise Duty on post sale incentives.
  • 8. Realignment of distribution chain e.g. number of depots restricted as depot in a State can now cater to customers in neighbouring states without extra tax implication.
  • 9. Benefits in transportation cost due to reduction in transportation time with abolition of check posts

(b) Further potential of saving in course of time due to tax neutrality such as through rationalization of procurement decisions on job work, level of assemblies & outsourcing, selection of vendors with location no bar, realignment of production processes even where units are in different States, eventual rationalization at vendor end as well – as all these decisions can be made purely based on operating efficiency alone.

(c) While the scope of Input Tax Credit is widened, a major negative is considerably increased compliance effort with credit matching concept and reconciliation issues. Moreover, the issue of concern is that while matching of credit with the tax actually paid is being insisted, since no formal mechanism has yet been provided by the Government for matching and confirmation of credit, the credit availed remains provisional. This issue may continue for some more time till GSTN return processes are revamped. With huge amounts at stake and with large vendor base, the auto sector is really apprehensive of this situation as even if few vendors are eventually found errant, cost implications can be very high. Keeping in view the difficulties, the Government really needs to relook at its stand on this matching obligation on recipient at least for the initial period of one to one and half years or so till the GSTN processes on return matching are revamped and stabilized.

(d) Another major negative is that in the absence of transactions at concessional rate like C Form or F Form transactions as permitted under the pre-GST laws, the requirement for working capital on inventory at all stages – in factory, at depots, in transit, at dealerships has gone up with blocking more funds in taxes. Credit accumulation issues at depot locations is another problem.

(e) In auto sector, it has been common practice for OEMs to provide dies, mould etc. as well as part of the material required by vendor (who procures rest of the material on his own account and as such does not qualify to be job worker) for supply of components to the OEM. There is ambiguity on how such items should be valued while they are sent to the vendor as well as while the vendor supplies the components and different practices are being followed with provisions interpreted differently. Since huge values and large number of transactions are involved, to avoid litigations at later date, Government needs to come out with an amendment / Notification clarifying that the value of such supplies should be reckoned as NIL, keeping in consideration the principle of value added taxation and the fact that these are only intermediary transactions and the value of such dies, moulds etc. and material is already considered in vehicle pricing and eventually subjected to tax.

(f) The issue of place of supply in case of tooling cost recovery where component supplier and the customer are in different state is also a bone of contention. Section 10 (1) (c ) of IGST Act provides that where the supply does not involve movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient. Hence, if the supplier of component develops tool in a state and the customer is located in another State, it is required to charge CGST: SGST which would not be available as credits to the customer located in different state resulting in increased cost.

(g) In case of international tooling transaction also, the cost is recovered from the foreign customer but in the absence of movement of tool from India to outside India, it fails to satisfy the condition of export of goods. The supplier has to charge GST resulting in increased cost and affecting international competitiveness of Indian automobile sector.

(h) The Input Tax Credit on supplies procured to provide fringe benefits to employees in terms of employment agreement/ conditions, is generally disallowed in GST also as under the earlier tax regime. While there is no justification for the disallowance itself in the system of value added taxation, the peculiar valuation provisions also require tax to be paid on such fringe benefits on their open market value. This is creating ambiguity and different practices are being followed. Even the Government responses are somewhat conflicting. Since auto sector employs large number of employees and it has been a trade practice of providing them with several fringe benefits, it is concerned about the issue. It is quite likely that the Government will not deviate from its policy of not allowing Input Tax Credit on supplies meant for providing benefits to employees. But to avoid ambiguities in this area, Government needs to notify that the value of any supplies to employees in terms of employment agreement / conditions will be taken as Nil as no Input tax Credit is allowed on the corresponding supplies used for the same.

(i) In order to receive supplies from vendors in other states just in time as per production requirements, one of the practices followed is vendor despatching the same little ahead of delivery schedules and the supplies being held at transporter warehouse at OEM location and supplied as per OEM requirement. With E way bill procedures, there is apprehension that under such arrangement view may be taken that these are local supplies requiring vendor to take registration at transporter warehouses, treat supplies as internal transfers, take credit and pay tax as local supplies on actual supply to OEM from the warehouse. This will complicate the existing practice

(j) Variation in the price of components is a common practice in the industry. The effect of such price variation has to be given by issuance of credit note/debit note. In view of the requirement to mention the reference of original invoice on the credit note/debit note, the component supplier is required to issue

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