Automobile Industry

India, with a huge population of over 1.2 billion people has undergone rapid changes in the last decade and have also started manufacturing a huge number of cars on an annual basis. With the current taxation structure in place, there are a number of taxes that are levied on the automobile sector such as VAT, excise duty, motor vehicle tax etc. The automobile industry will make a transition into the GST regime. Despite the fact that it is relatively very early to conduct an analysis about the cost incurred on the automobile, once the GST is implemented, there is still some level of obscurity that still remains about various exemptions and the tax rates that will be applicable for various States to the various OEMs and dealers for manufacturing automobiles. Some of the industry experts have collected and conjoined the information, and have given their predictions about the actual impact of GST on the automobile industry, once it gets applicable on July 1st, 2017.

Tax laws applicable under the current regime on the automobile industry

In the current scenario, VAT is applicable on the resale of old cars. But, in some of the states, a comprehensive rate and VAT are not levied on the advance money that is received for the supplied goods and services. A majority of the states look to provide the automobile equipment-makers with some incentive schemes that are attached to investment. The two major areas that comprise this taxation structure are the loans that are free of interest and various subsidies that are linked to the sales tax and are payable at the time of fulfillment of sale.

Under the current regime, the sale of goods and services that does not form a part of the consideration set is currently excused from the tax being levied under CST and Value added tax. The number of dealers and importer of equipment are not eligible for the excise duty and other taxes that are due to paid Original Equipment Manufacturers (OEMs). As the automobile equipment get transported from the respective plant, excise duty needs to be levied but not Value added tax or sales tax is valid as per the present tax regime. Some of the automobiles such as three-wheeler vehicles, vehicles operated on electricity and the ones that work on the fuel cell technology, vehicles that are used by PWD citizens and ambulances of hospitals are exempt from the additional cess that is levied by the State Government.

How GST will change the game for the automobile industry

A couple of taxes that are levied under the current regime are VAT and excise duty, with a comprehensive rate coming somewhere in the range of 26.5-44% that is substantially higher than the proposed rate of 18% and 28% by the GST Council. What still remains an area of concern is that the Council has still not decided on the resale of old and used cars. Some level of clarity is also needed about the various incentive schemes laid down by various State Governments given the inevitable transition to GST.

This is a path-breaking news for the importers of these equipment as they would be able to apply for a refund while in the current scenario, they are not eligible to claim their refund on the VAT and excise duty that has already been paid. Excise duty that is levied on stock transfer will fall under the bandwidth of GST. GST would play a pivotal role in lending a helping hand to the manufacturers of automobile equipment to acquire auto parts at a relatively inexpensive price as the whole supply chain system will stand to improve during the GST regime.

In the current regime there are a number of warranties and free services that are presented by various OEMs due to the sheer level of competition in the automobile industry. These freebies that are offered by the car dealers are not taxable under the current tax regime. Once GST takes over the structure of indirect taxes in India, these freebies and service warranties will fall under the purview of taxation.


Once GST comes to the helm of things, it would certainly lead to a reduction in the cost of manufacture of vehicles, eclipsing the effects of taxes that are levied under the current regime. The taxes would be levied at the time of consumption and not at a place where the manufacturing actually begins. This would certainly play a vital role in giving a much needed boost to the automobile industry in both short as well as long-run.

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