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GST to leave Neutral Impact on the Automobile Industry; Sedans and SUVs to leverage

The GST (Goods and Services Tax) Act has already been announced and it would be applicable effective from 1st of July 2017.

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The new bill, as expected, is affecting the indirect tax rates in vogue at present. It will replace all other applicable taxes (indirectly or directly). It’s quite evident that some goods and services will get costlier while many others will get cheaper due to the amendments in the existing service tax. The automobile industry is no different and therefore won’t remain untouched.

GST and the Automobile Industry

The automobile segment of the market has got the GST rate set at 28%, which is added to the base rate. As per the government, a cess will levy on different category and type of vehicles, which on the other hand would directly affect the price of these vehicles accordingly.

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Various small and large cars with different engine variants (i.e. Petrol and Diesel) would also have a cess of 1% and 3% additional to the existing rate of 31.4% to 33.5%; the base GST rate being 28%. As GST is considered to subsume infrastructure-cess that is being levied on the passenger vehicle industry in India, the new price of small cars would either reduce marginally or be neutral. The auto insurance industry would also be affected by the new GST rates. The new tax rate would increase by up to 3%. So, this is the best time for smart buyers to get hold of their money and invest to get the maximum benefits. Currently, 15% taxes are applicable on an average insurance premium, which includes both Swachh Bharat Cess and Krishi Kalyan Cess. The tax rate will hike to 18% and the cost of buying and maintaining insurance is also going to get high.

GST Effects on Vehicle Prices

Individuals planning to purchase cars anytime soon in July or later in 2017 now have to think twice before releasing the payment. They now will have to recalculate their personal finances and give it a second thought, as there could be significant changes in the prices of their dream cars. The expected changes are as follows:

The bigger sedans (length more than 4000mm and engine above 1500cc) and SUVs (ground clearance more than 170mm and engine above 1500cc) are expected to have lesser taxation effects. This would see lower taxation (current rate 46.6% to 55.3%) and result in the reduction in the prices of these cars even after 15% cess additional to base GST rate of 28% applicable. In fact, this segment of cars is expected to benefit from this taxation.

On the other hand, the green vehicles, which the government has been promoting, will have a cess of 15% imposed additional to the 28% base GST rate. The cost will increase going forward while the current rate is 30.3%. However, the small hybrid vehicles are not going to attract additional 15% cess, as clarified by officials. Furthermore, the vehicle operated electrically will have a GST rate of 15%.

All commercial vehicles, three wheelers (current rate 29.1%), and two wheelers (max up to 350cc), there won’t be any impact of the new taxation. In contrast, there will be a 15% cess additional to the base GST rate of 28% on the mini bus segment, which is expected to be reconsidered by the government later. Two-wheelers above 350cc are likely to attract an additional 3% cess, which will lead to a tax rate of 31%.

In India, tractors are free from excise duty. An additional VAT of 5% to 5.5% is likely to be levied, which marks their ineligibility to claim credit the tax input by the vendors on component manufacturing. The tractor industry is most likely to have a cess of 12-13% levied on it.

Wrapping up!

As GST will subsume CST, companies are no more required to have their warehouses/depots, including C&Fs agents at different locations in the country. The companies will now be able to consolidate their current warehouse infrastructure, aiming at benefitting from the lower costs they incurred in the supply chain.