Lifting the auto sector

Mohan R Lavi | Updated on September 06, 2019 Published on September 06, 2019

GST rate cut and input tax credit facility needed

Employees of government agencies and departments should be smiling all the way…to their cars. One of the measures announced by the Finance Minister to revive the comatose automobile sector was that government department and agencies would replace their old vehicles with new ones.

While the new-car move appears to be a case of missing the wood for the trees, the other measures such as additional depreciation for commercial fleet providers and increasing credit to the sector should do their but to infuse some oxygen into the sector.

Surprisingly, a reduction in the GST rate that the sector has been clamouring for hasn’t happened yet. Multiple reasons have contributed to their present state — steel prices, elections, the liquidity crisis that followed the IL&FS saga, BS-VI requirements, and the fact that the future is going to be in electric cars.

A key industry

Numbers prove the importance of the automobile industry to the Indian economy. The industry contributes almost 49 per cent to India’s manufacturing GDP and provides employment to over 37 million. Its contribution to total GST collections is a sizeable 14 per cent.

Particularly on GST, the government could have called for a special meeting of the GST Council (in person or over video-conference) to decide on ameliorative measures. On electric vehicles, the GST Council has already done its bit by reducing the tax rate from 12 per cent to 5 per cent and from 18 per cent to 5 per cent for chargers and charging stations, respectively. Hiring of electric buses (with a carrying capacity of more than a dozen passengers) by local authorities is tax-free.

Most automobile companies are putting their money into manufacturing electric vehicles. However, it is the non-electric vehicles that need immediate succour. The consensus opinion appears to be to reduce the tax rate from 28 per cent to 18 per cent. While this is the base need, much more needs to be done to lift the industry out of its slumber. A compensation cess at different rates is levied over and above the GST rate.

The cess rate varies depending on the number of persons a vehicle can carry, the length of the vehicle, the cubic capacity of its engine or its ground clearance. When introduced, the rates ranged from 1 per cent to 15 per cent. At a time when the industry is seeking compensation from the government, levying a compensation cess on them and thereby on the ultimate consumer isn’t logical. The cess should be deferred for at least two years, thereby giving sufficient time to the industry to find its bearings.

In addition to the rate cut and deferring the compensation cess, the GST Council should also defer Clause 17(5)(a) of the CGST Act for a couple of years. The clause restricts availing of input tax credit on motor vehicles and other conveyances except when they are used for further supply of such vehicles or conveyances, transportation of passengers, imparting training on driving, flying, and for transportation of goods. Deferring this clause would enable taxpayers to take credit of the GST paid on vehicle purchases — this by itself could spark an increase in demand. Credit can be permitted to be taken on the purchase of any vehicle in this period of two years. The GST Council should not be tempted to put in any artificial restrictions on this credit by linking the amount of credit to seating or cubic capacity of the vehicle. A GST rate cut, deferring the compensation cess and permitting input tax credit can do wonders to the automobile sector — both psychologically and economically.

The writer is a chartered accountant

Published on September 06, 2019

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