GST implication on automobile industry

[Aporna Dasgupta]

India- having an accelerating economy, which has made a move to switch to the third gear, the demand in the automotive sector has been on the rise. With a rise in socio-environmental awareness and introduction of electrification of cars, personalization and allied service industry, one can say that the automotive sector in India is here to stay. 

GST in India is still in the crib and has the potential to impact the policy makes, global investors etc., albeit the existence of various hindrances. Let us look at the issues that are specific to this sector and the resolution provided or yet to be provided: 

1. GST on advances 

Initially, the GST law sought taxes on advances which lead to significant working capital as the receipt of advances is the industry practice. However, the law gave some relief by doing away with charging GST on advances received for sale of goods1, effective from 15.11.2017. 

2. Valuation 

GST is applied on the ‘Transaction value’ which is the value adopted where the supplier and buyer are not related and price is the sole consideration for sale. But the transactions that take place where the parties are related are guided by valuation rules. 

Rule 28 of the Valuation Rules provides the following options in sequence to be adopted in case of supplies between related persons: 

• Open Market Value (‘OMV’) of such supply 
• Value of supply of goods or services of like kind and quality 
• 110% of the cost of supply of such good services or 
• Reasonable means consistent with the principles and general provisions of section 15 of the Act. 

Another option available for when goods are intended for further supply ‘as such’ ( eg. By a manufacturing company to trading company), is to value goods at 90% of the final sales price. 

The second proviso to Rule 28 states that where the recipient would be eligible for full input tax credit, the value declared in the invoice is deemed to be the open market value of the goods or services.  

The question that arises here is that the declaration of a nominal value in the invoice by the supplier simply due to the availability of input tax credit to the recipient, would be acceptable to tax authorities? 

3. Job work 

• The goods sent to a job worker takes the colour of a supply only when the inputs or capital goods if not received back within 1 year or 3 years respectively, and hence GST would have to discharged by the principal. In case the input goods or capital goods are returned by the job worker after 1 year or 3 years, it would be a supply and GST would have to be discharged by the job worker, if registered, else the principal has to discharge under RCM. 
• The goods when sent to the job worker’s site, needs to be accompanied by a Delivery Challan. By the use of a fresh DC or endorsing the same DC the job worker can supply the goods to another job worker. 
• In case the goods are sent to the job worker’s site directly by the supplier, the job worker’s site has to be added as consignee on the tax invoice. 

4. Vendor tooling 

In GST law, the tools, moulds, dies, jigs and fixtures manufactured by a vendor/ component manufacturer; the ownership is transferred to the OEM whereas the possession remains with the vendor. After which the manufacturer uses the parts given by the vendor. In such a case these two cases can be viewed as two different supplies i.e. supply of tool by vendor to the OEM and supply of components manufactured using those tools. However, it has been clarified that in valuation  

Sl. No	Issue	Clarification
1	GST apply on moulds and dies sent by OEM to component manufacturer at FOC?	Doesn’t constitute a supply as there is no consideration. Further the component manufacturer doesn’t have to reverse the ITC as it is being used for the purpose of business.  In case moulds are supplied by the OEM where it was agreed that the component manufacturer would supply, then the amortization
2	Treatment of GST involving both physical parts and labour service, which is billed separately?	GST would be applicable as per the rate arising for the specific HSN.

5. Sale of second-hand motor vehicles 

The Rate of GST on old and used vehicle as follows2: 

1. GST-18% on Old and used motor vehicle which uses petrol Liquefied petroleum gases (LPG) or having engine capacity of 1200 cc or more and of length of 4000 mm or more. 
2. GST-18% on Old and used motor vehicle which uses diesel and has engine capacity of 1500 cc or more and of length of 4000 mm 
3. GST-18% on Old and used motor vehicles of engine capacity exceeding 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility 
4. GST-12% on All Old and used vehicles other than those mentioned above. Cess on sale of used vehicle has been exempted. 

Note: Government also Exempted the Cess applicable on sale of Used vehicle through  

Value on which GST at above rates to be calculated shall be Margin of Supply which is to be calculated in the manner as mentioned in Notification which is given below: 

1. Depreciation as per Income Tax Act: Margin of supply shall be difference between sale consideration and written down value and GST is to be calculated on the margin. It is to be noted that Income Tax requires computation of depreciation on the asset block, but for the purpose of GST rate is required to be applied for the specific motor vehicle. 
2. Other cases: Margin of Supply shall be difference between sale price and purchase price Tax to be calculated on such Margin, and where the margin of such supply is negative, it shall be ignored. Negative value in valuations, need not be considered as exempt non-GST supply, and therefore, therefore there is  

Sale of used vehicles supplied by Government– Sale of used vehicle by Central Government, State Government, Union territory or a local authority, the registered person receiving the supply is liable to pay tax under reverse charge4.  

In case of sale of used vehicles supplied by Government to unregistered person, the respective department of the Government is required to obtain GST registration and pay GST.5  

It was also held by AAR Maharashtra in re (2018) CMS Info Systems Ltd. GST is payable on supply of old motor vehicles as scrap 

6. Classification of parts 

Classification of a product has been made simple by following the HSN code, however, there are multiple vehicle parts which can be used for more than one purpose, and hence the classification issue arises which in turn affects the GST rate that is to be charged on the vehicle. Chapter 87 of the GST rate schedule has is dedicated for automobile parts, however, based on the usage of the parts, the classification could fall under the purview of other chapters perhaps at a higher rate of tax.  

For example- bearings can be classifiable under Chapter 82 taxed at 18%, whereas, automobile parts are classifiable under Chapter 87 which is taxed at 28%. This leaves the industry players to decide among the two options i.e., adopt the highest rate on a conservative basis or run the risk of litigation when adopting the lower rate of tax. Hence, clarifications in this regard is the need of the hour. 

7. Classification of units imported  

When a person imports a vehicle/ the part of a vehicle the person is often faced with multiple issues, one of which is classification of vehicles in kit form at the stage of imports. There are 3 stages at which a vehicle/ part can be imported, which are as follows- 

1. Completely Built Units (‘CBUs’)- These units are almost ready to use without the requirement of having to be processed/assembled in India and thereby has the highest import duties. 
2.  Semi Knocked Down (‘SKD’) kits- Here, partial assembly of the vehicle is required. 
3. Completely Knocked Down (‘CKD’)- This could be classified as the import of parts or a vehicle whose major assembly is required to be done in India. 

The issue of classification of imported auto parts has been in the light of discussion for a long time and now that the that the effective Customs duty on import of such vehicles could soar as high as 180% of the import value. Provision of clarification about the classification of the units of the aforementioned stages can reduce the number of AARs and litigation. 

8. After sale transactions 

The after-market transactions mainly consist of warranty, extended warranty, annual maintenance contracts (AMC), paid services, etc. The issue in hand w.r.t the supply of such service is whether to classify as a composite supply or mixed supply or single supply needs to be tested in case of warranties, AMCs, repair works, painting jobs, body-building works, etc. In a GST circular on ‘Clarifications of certain issues under GST’ dated 8 June 2018 issued by CBIC, one of the issues addressed was “How is servicing of cars involving both supply of goods (spare parts) and services (labour), where the value of goods and services are shown separately, to be treated under GST?”  

In this regard, it was clarified that the taxability of supply would have to be determined on a case-to-case basis by looking at the facts and circumstances of each case. Thus, where a supply involves supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services separately.  

Therefore, the after-market transactions are to be closely analysed in terms of facts of each case. 

When reviewing a comprehensive annual maintenance service, which also involves incidental supply of spare parts/ goods, it can be understood that since the supply of service is for one and fixed price, the supply of goods/ parts come naturally bundled with the supply of service and therefore should be construed as a composite supply of service.  

Another issue in auto industry exists where dealers make warranty replacements to customers on behalf of the OEMs and charge the same to OEMs, the same would be subject to levy of GST. Since, the OEMs would not receive the goods, the credit of the GST charged by the dealers may not be available to the OEMs6. One of the ways forward would be to opt for “Bill to OEM and Ship to” mechanism, where the warranty service can be treated as a composite supply of service and availing the credit can be availed without actual receipt of goods. 

9. Supply of servicing coupons  

The coupons are sold along with the car, and give services at FOC for a few initial services. GST on such coupons needs to be paid immediately on the date of issue of such vouchers7. As per the policy of some manufacturers, the amounts in respect of such coupons will be redeemed to the dealers only once 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 automobile manufacturers only when the vehicle comes for the repair leading to unnecessary blockage of funds in taxes. 

10. Car sent for exhibitions 

It has been clarified in one of the FAQs released by the CBIC that answered the question if GST would be applicable on goods not intended to be sold, taken out for participation in overseas exhibitions and trade fairs and brought back into India as these goods are meant for exhibition only? It stated that GST would not payable. Exporters will need exhibition participation letter and no foreign exchange involved letter from the concerned bank for the purpose of exchange control requirements. At the time of re-import, identity of goods imported with export goods needs to be established to seek exemption from import duty in accordance with Customs provisions. IGST will be exempted at the time of re-import in view of exemptions granted under Customs. However, what needs to be pondered upon is the case where the cars are sent to an exhibition and then supplied to a distinct person at FOC; would that be subjected to GST? 

By this we understand that a lot of ambiguity still exists with regard to the automobile sector, and the industry awaits the required clarifications.