The auto industry is an important indicator for the growth of the economy. It propels the manufacturing sector and also drives the economic well-being of the country. Currently the industry is an important contributor to the central excise duty, service tax, Value added tax and Central sales tax. All these are proposed to be subsumed in the Goods and service tax (GST) and it may change the business methodology existing today.
For the auto industry the centre point for the sales is the dealer network. The dealerships not only sell the vehicles but also have attached service centres where they carry out the servicing and repair of the vehicles as well. The dealerships are located all over the country and hence 80-85% of the sales happen in the states other than the state in which the manufacturing unit is located. The auto units follow two distinct strategies in the sales. They either sell the vehicles directly to the dealer where the CST is payable, or transfer it to their warehouses located in the various states which do not attract CST. CST adds on to the cost of the vehicle and cannot be set off against the VAT liability of the dealer. In case of stock transfers the state VTA laws provide for retention or reduction of input tax credit in the exporting state.
The GST is proposed to be applicable on all supplies emanating from the manufacturing plants as it is a destination based tax. This will also be applicable to the stock transfers. Hence, it will give rise to new challenges. The first and the foremost among them is the valuation of the stock transfers in the absence of sales value to calculate the applicable tax. As and when the GST becomes applicable there may be a need for transitional phase provisions for movement of stock from the unit to the warehouse in another state. Also, since the GST will be payable in full at the time of dispatch from the unit with the actual sale from the warehouse happening at a much later date, may entail some cash flow problems.
Many of the auto companies have invested in the states where they have got incentives and tax benefits. These have a significant bearing on the final cost of the automobile produced. How these incentives will be treated and how the exemptions will play under the GST still remains to be seen. The backward areas and special industrial zones promoted by the states will have little significance in the investment decisions if these benefits are withdrawn with the application of GST. The auto industrial units that are currently availing these benefits are likely to lobby hard for the retention of the exemptions even after GST rollout.
Today the tier-1 auto component manufacturers operate through multiple plants which are set up in the states where the OEM plant is located. This is specifically done with a view to avoid the CST and availing the VAT credit chain without breaking it. With the GST the whole country is likely to become one market with no interstate barriers. This will allow the tier-1 manufacturers to consolidate their operations in one place and enjoy economies of scale.