IMPACT OF GST ON AUTOMOBILE DEALERS

[Dr. Sanjiv Agarwal]

Present Indirect Taxation

This sector basically comprises of Manufacturers, Automobile Dealers & Retailers. Presently, all of them are paying various indirect taxes such as:

• Excise Duty on manufacture/production of vehicles along with cesses,
• Service tax on services both as provider and also as receiver under reverse charge,
• Value added tax (VAT)/Central sales tax (CST) on Sale of Vehicle/ Spares/ Accessories;
• Central Cesses

Taxation under GST Regime

Taxable Person

For GST, ‘taxable person’ means a person who is registered or liable to be registered under section 22 or 24 of the CGST Act, 2017.

Example

If as an Automobile dealer has obtained separate registration for its administrative office, showroom and workshop in the same/different State(s), then in case of separate registrations such administrative office, showroom and workshop, shall be treated as distinct persons. Accordingly, transactions between distinct persons will be subject to levy of GST.

Registration

Under GST regime every person who is liable to be registered under the Act, shall have to apply for State-wise registration for supply of goods/services from different States. There is no concept of single centralized registration under GST regime as is presently done. This will pose problems of compliance and hardship to tax payers having operations in more than one state.

Valuation

As per section 15 of the CGST Act, 2017, the value of a supply of goods and/or services shall be the transaction value, that is the price actually paid or payable for the said supply of goods and/or services, where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

The value of goods/services is subject to some inclusions and exclusions. The inclusions are:

• Any taxes, duties, cesses, fees and charges other than in CGST Act, SGST/UTGST Act or compensation cess if charged separately by the supplier. (Example: toll tax etc.)
• Amount paid by the recipient w.r.t. supply on behalf of supplier and not included in the price actually paid or payable (Example: Labour payment made by the recipient on behalf of supplier)
• Incidental Expenses such as employee insurance
• interest or late fee or penalty for delayed payment of any consideration for any supply (Example: Interest on delayed payments)
• Value of subsidies linked to supply excluding subsidies provided by the Central and State Governments

However, value of supply shall exclude any discount that is given:

(a)    Before or At the time of the supply: Discount has been duly recorded in the invoice issued in respect of such supply, and

(b)    After the supply has been effected

(i)    Discount is established in terms of an agreement entered into at or before the time of such supply, and

(ii)   Specifically linked to relevant invoices, and

(iii)  Input tax credit has been reversed by the recipient of the supply as is attributable to the discount on the basis of document issued by the supplier.

Accordingly, transaction value shall be considered for payment of tax, with various inclusions prescribed in the valuation provisions where ‘price is the sole consideration for sale’ and parties are not ‘related’. The powers for rejection of the transaction value are very wide, and could lead to significant valuation disputes which are currently also being faced by the Automobile industry like-

• Sale below the cost for market penetration treated as ‘additional consideration’
• Inclusion of State Industrial Promotion Subsidies retained by the manufacturer.
• Deductibility of post-sale discounts from value under excise
• Valuation of demo cars
• Treatment of pre-delivery inspection charges and other reimbursements to dealers, advertisement charges recovered from dealers etc.
• Sales through marketing companies and mutuality of interest
• Commission from banks and insurance companies

Following valuation issues concerning Automobile industries are a challenge which require redressal from your good office:

Road Tax/ Life Tax - Currently, service tax or VAT is not paid on the Road Tax element. However, in the GST regime, value for the purpose of paying GST should also include Road Tax. Section 15 of the GST law clearly states that no taxes shall be allowed as reduction from the value except CGST, SGST/UTGST and IGST. Therefore, duplication of taxes to this extent will continue, as road tax is not being subsumed in GST. Road tax rates vary from State to State, are fairly high and ranges between 2% to 15%. This would unnecessary increase cost for the consumers.

Reimbursement of Insurance, Registration etc. - In the  GST Law, it is not stated whether GST is also required to be paid on the reimbursements. Automobile dealer collects various amounts from customers which are mere reimbursements and are paid back as it is to someone else. In other words, such amounts are collected merely as a pure agent, For example,

• Insurance of the vehicle,
• Temporary/ permanent registration charges,
• High security number plate charges,
• Credit card swiping charges etc.
• Any other ancillary charges .

Currently, Service Tax is not paid on such values, if collected as a pure agent. Under GST law, such specific provisions are not yet specified and it should be made amply clear that these amounts shall be treated as out of GST net and valuation of reimbursements as pure agent may be kept out in the valuation rules.

Valuation of Commissions/Incentives - In case of various commissions received from the manufacturers such as for ‘Extended warranty’ or ‘Road side assistance’, Service Tax is being paid only on commission element. However, in GST regime, such tax treatment may not be acceptable and dealers may have to pay GST initially on the entire value of the warranty receipts and the amounts charged by the manufacturer may later be taken as a credit.

Pre-supply Discounts - The deduction for discounts is provided subject to the condition that the same is shown in the invoice and is in the course of normal trade practice. The term ‘normal trade practice’ is very subjective and especially in the automobile industry, the discounts vary depending upon the variants, new product launch, etc., and this may lead to valuation disputes.

Post-supply Discounts- Generally, dealers receive various discounts from its manufacturers based on targets, vehicles lifted, Special Customers, Year-End Discounts etc. It is pertinent to note that post supply discounts will not be allowed as deduction from the value if the same is not linked to any invoice. Therefore, discounts policy needs to be reviewed and the same must be brought in line with the GST law to avoid tax on high values and litigation.

Dealer Incentive Schemes - At present, dealer incentive schemes are not subject to VAT, but there are issues on applicability of service tax on dealers, depending on the terms of each scheme. The nature of such schemes is that these schemes are not an independent service by dealers to the manufacturers, but are in the nature of post-sale discounts.

If such incentives or discounts are in the nature of post-supply discounts, then they shall be excluded from transaction value for the purpose of payment of GST subject to conditions as provided in law and is known before hand. But if such schemes are treated as services by dealer then in such a case, these shall be included in the transaction value and shall be subject for payment of GST. However, provisions of time of supply will have to be addressed while determining taxability of these schemes.

Advances for Supply-Under the existing law, advance received towards supply of goods is not taxed both under Central Excise and VAT law. However, under the GST Law, receipt of advances is sought to be treated as a taxable event. In this context, it is also relevant to note the definition of the term ‘consideration’, which states that any deposit shall not be treated as payment made for the supply, unless the same is applied as consideration for the supply.

There may be two views taken for advances for supply, i.e.

• Either it can be treated as payment received towards supply i.e. consideration for supply or;
• Can be treated as ‘deposit’.

If second view is taken, the date of appropriation of the deposit towards a supply may be treated as the date of payment. This would also lead to ambiguity in interpretation as to what should be the date of such appropriation (like date of Vehicle Identification Number (VIN), date of registration of vehicle with the regional transport office etc.). This issue requires clarity.

Vehicle Booking Advance- Currently token money received as advance towards booking of vehicle is not liable for VAT as the same is payable at the time of sale of vehicles. However, this practice of holding advances without payment of any taxes will be withdrawn in the GST regime and taxes will have to be paid on receipt of the booking advances also. Therefore, dealers may either have to pay tax on the advances also out of pocket or may collect taxes extra even on the token advance.

Free Service Coupon Vouchers-These coupons are issued at the time of sale of the vehicle. As per the time of supply provision, GST on such coupons will have to be paid immediately on the date of issue of such vouchers. As per the practice of some manufacturers, the amount in respect of such coupons is redeemed to the dealers only when the customer brings the vehicle for repair to the workshop. Therefore, dealers would have to pay tax on such coupons immediately on its issue but the said taxes can be collected from the customers only when the vehicle comes for the repair leading to unnecessary blocking of funds in taxes.

GST on Stock Transfers (Supply without Sale)

Since, transfer of vehicle/ spares to other premises will be liable for GST if the transfer is in the course of inter-state trade. Further, if there are separate dealerships of a dealer and separate GST registration number is obtained for each such dealership, then transfer of any goods/ services between such dealerships will also be liable for GST. This will result in blocking of the working capital as the taxes needs to be paid from own funds and collection of taxes will be at a later date when such goods/ services are eventually sold.

Tax on Second Hand Vehicles

In GST, there may be additional tax burden on transactions in second-hand motor vehicles and exchange of vehicles. The proposed GST rules, issued by the Government will consider the market value of the new vehicle while calculating the tax burden. Thus, consumers may end up paying more as the discounted amount would be taxed. Under the new GST rules, retailers and traders dealing in used vehicles will come under taxation. While under the existing rules, second – hand products are outside the purview of tax and as such, sellers will have to pay taxes at the same rate as the new products.

It may also increase the working capital requirements of dealers of used vehicles. Earlier the tax used to be calculated on the discounted value of a product in the case of exchange schemes after the market value of the old vehicle was deducted.

Working Capital

GST is also likely to affect the working capital and cash flows of dealers as GST would be applicable on inter-unit transfer of motor vehicles, advances for booking, free service coupon arrangements with dealers and all types of incomes for commissions/incentive/pay outs etc by banks, insurance companies, manufacturer etc.

Discussions to this article

[Ganeshan Kalyani]

Very useful article for all the readers, taxpayers, experts , querist etc. Thanks for sharing this with us.

[abhishek ghai]

Dear Sir,

Thanks for such useful article, I do have some queries related to certain provisions of GST covering Automobile Industry, the same are as follows-

1. Whether Supply of Spare Parts and Service Charges would be continued to taxed separately as Supply of Goods and Supply of Services and accordingly taxed at the applicable rates or will it be treated as Composite/Mixed Supply on Case to case basis??

2. Whether Provisions of Sec 140(3) shall cover already registered Automobile dealers who are also running their Service Workshop for servicing of Vehicle??

3. Admissibility of Cenvat Credit on Demo vehicle i.e., Excise Element paid on Excise Bills, though such cars have been capitalized in books of Accounts of the Dealer. Thanks & Regards,

[Pranay Jain]

Dear Sir,

Thanks for sharing this, I am an automobile dealer, but there are few points which need to further discussed

1. GST on road tax doesn't make sense, since it is not part of consideration value and it is imposed on complete invoice value including VAT or GST. So Road tax on GST and GST on road tax would be like circular reference sort of thing where both taxes are applicable on each other.

2. Free Service Coupon reimbursement by manufacturer is made in many cases to dealers when they are actually used by customer at service stations not at time of issue. So the time of supply and consideration is a later date when they actually used by customer not when they are issued.As 25-35% of coupons remain unutilized so they never actually paid by manufacturers.

3. Discounts and target incentives which are part of dealer reimbursement decided at starts of financial year or are time to time announced by manufacturers would be subjected to GST or not?

[Dr. Sanjiv Agarwal]

Thanks, Mr. Ghai and Mr. Jain,

While solution to your queries / doubts could be addressed separately, my short comments are as under:

1. Spare parts and services charges may be billed separately failing which it may be treated as mixed / composite supply. It would however, lead to dispute for being treated as mixed or composite supply.
2. Section 140(3) may not cover automobile dealers as they are covered under Service Tax / VAT
3. Input credit can be taken for demo vehicle if it is being capitalized
4. Road tax is not being subsumed in GST
5. Free service coupons may taxed at redemption (Refer place of supply provisions in IGST)
6. Pre-announced discounts or incentives may not be taxed.

 

You may write to [email protected] or [email protected]

 

 

[abhishek ghai]

Respected Sir,

Please clarify whether the following stands correct as in my opinion benefits of

Sec 140(3) would be extended to already registered persons i.e., trader/Service Provider-

1. The opening line of the section says that - "A registered person, who was not liable to be registered

under the existing law", Section does not say- under "any" of the existing law. Can we not safely assume

that currently traders are not liable to be registered under Excise?

Hence even registered persons would get covered under the same, whether registered under Vat or Service Tax.

2. Section intends to pass benefit of central taxes i.e., Excise Duty on the goods which are part of the cost

of the goods held in stock by the taxable person on the appointed date. A logical reasoning of the same can be

established with the help of following example-

Assuming Car held in stock as on appointed date: ₹ 289375 including Excise Duty paid on Stock (ignoring CST or VAT Paid) as follows-

Basic Cost of the Car: ₹ 250000.00

(+) Excise Duty Paid: ₹ 31250.00

(+) NCC Duty: ₹ 2500.00

(+) Cess: ₹ 3125.00

(+) Infra cess: ₹ 2500.00

Total Cost of Vehicle ₹ 289375.00

Eligible Excise Duty ₹ 33750.00 (31250+2500)

On supply of Vehicle under GST Regime, the same will be billed at 14% CGST and 14% SGST, assuming highest rate- and cess which is awaited

Sale Vale: ₹ 300000.00

(+) CGST: ₹ 42000.00

(+) SGST: ₹ 42000.00

Total value ₹ 384000.00

Thus owing to change in Tax rate under GST, there shall be additional tax burden of Central taxes in form of CGST

and therefore the counter-effect of the same may be lessened by giving tax benefit of Excise Paid on Stock.

3. Even under proviso to sec 140(3), benefit of central taxes are being intended to pass on to traders (as even

proviso is silent on this aspect i.e., registered under existing law or not).

Thus on account of the aforesaid views, I am of the opinion that Registered Car Dealers under GST shall be eligible

for tax benefit of Excise Duty paid on Car and even Spare parts procured for Servicing purpose.

Please express your views. Thanks in advance

Regards,

CA Abhishek Ghai

Kanpur

Email: [email protected]