GST CONCERNS OF AUTOMOBILE DEALERS

[Dr. Sanjiv Agarwal]

Goods and Services Tax (GST) in now a reality and then most of the present indirect taxes on goods and services shall become history making GST indeed historic. The launch ceremony at Parliament House has rewritten a new destiny, this time an economic one. GST, though has been claimed as one of the biggest tax reforms ever, it is also being seen as one of the most challenging times for automobile sector. Here is an attempt to flag certain areas of concerns for automobile industry and automobile dealers which are indeed grey, both in colour as well as in understanding and interpretation.

Closing Stock of Vehicles / Spare Parts

GST law provides that all closing stocks of finished goods and inputs cannot be transferred to GST regime with full tax benefits. For no fault, assessee's stocks older than one year will result into monetary loss to dealers as 100% tax benefit will be allowed only in cases where conditions (which are not easy) are fulfilled.

Carrying forward of unclaimed Credit

Depending upon rate of tax on input and spare parts in GST regime, i.e., 18% and above or below 18%, input tax credit would be allowed only to the extent of 60% or 40% respectively resulting in residual loss to auto dealers. This is inevitable as in most of the cases, duty paying documents are not available. Consequently, tax payers will have to pay more or dealers book losses.

Demo Cars / Vehicles

Demo cars are used for marketing and training as a usual business practice which are presently not considered as capital goods. There are two divergent views on the same in view of specific denial of credit to motor vehicles in input tax credit provisions.

Discounts on Vehicles

Giving discounts to buyers of vehicles by dealers in different forms is very common. It could be via invoice or otherwise. Dealers also get discounts from the manufacturers of vehicles in the nature of quantity or trade discount / incentive. Their tax treatment and documentation would be crucial to avoid interpretational disputes with the Department.

Marketing Strategies and Freebies

At present auto dealers offer incentives to potential buyers in the form of free insurance, free accessories, fuel coupon, extended warranty etc which may by taxable in GST regime. Valuation rules do not permit such practices unless properly documented and as such, tax would be attracted. If not, dealers may not get input tax credit on these activities as these would imply exempt supplies.

Dealing in pre-owned Vehicles

Today, there is not tax or a lower tax on pre-owned or second hand vehicles. In GST, tax would be payable on all such deals at full value or at differential value where input credit has not been taken. The problem is two-fold, valuation issue as well as rate of tax which is likely to be same as in case of new car. Cess may also be applicable which is not yet clear.

Composite Contracts of Sale and Service

Vehicles are generally subject to repair and maintenance which will involve supply of consumables as well as spare parts. Rates of both goods as well as services would be different, i.e., 28 or 18%. The problem of treating a transaction as a mixed or composite supply is a technical issue wherein interpretation may be divergent and would lead to disputes.

Heavy Taxes on pre-owned Vehicles

Dealing in second hand goods (pre-owned vehicles) is a substantial part of dealer's business. There is no concessional rate of tax prescribed looking to the fact that such goods would have suffered tax already at the time of first purchase.

Advance Booking of Vehicles

Vehicles booking by paying advance money has have been taxed in past but in GST regime, advance bookings will be taxed when such advance is paid, adversely impacting working capital. This could result in acceptance of lower advances which will adversely affect the working capital of manufacturers.

Free Services / Warranties

Free services on behalf of other dealers or manufacturers, extended warranties, reimbursement of expenses as pure agents are contentious issues which may lead to non -compliance, disputes and litigation.

All these pointers go on to reveal that it is not going to be a smooth ride in GST for auto dealers but it could be full of bumps owing to potholes on the journey to GST. Let's hope that the present tax authorities, as they are, will soon come out with proper clarifications.