The finance ministry seems to be having second thoughts on whether to accede to a growing demand from the auto industry for goods and services tax (GST) rate cuts, given the hole it might burn in the revenues. Instead of asking for GST relief, the Indian auto companies must try and lower costs by reducing assorted royalty payments to foreign parents and use the resultant room to drive sales via price cuts, a ministry official said, on condition of anonymity.

Citing a pick-up in sales of some auto segments like passenger vehicles and two-wheelers in August, he said the sector was already on a revival path.

Speaking at a CII event in late August, finance minister Nirmala Sitharaman kept alive the auto industry’s hopes for GST cuts. Responding to an observation on the need for lowering the rate on two-wheelers, the minister said it was “indeed a good suggestion, as this category is neither a luxury nor a sin good and hence merits a rate revision”.

The minister’s statement came at juncture when chances of tax cuts appeared remote, so it surprised many. GST revenues have been way below the targets for last few months; the GST Council has recently estimated the shortfall in states’ GST receipts for FY21 (after factoring in the compensation cess proceeds) at a whopping Rs 2.35 lakh crore. A big shortfall against the Centre’s budgeted GST receipts is also evident.

The finance ministry in a recent note also highlighted that as against the revenue neutral rate (RNR) computed by the RNR Committee of 15.3%, the weighted GST rate at present is just 11.6%.

Indian auto makers shell out large amounts as royalty to their foreign parents. Tax reliefs on royalty under bilateral tax treaties between India and other countries aid the royalty outflows. Maruti Suzuki, for example, reported royalty payments of Rs 3,817 crore to Suzuki Motor Corporation in FY20.

With the introduction of GST, multitude of taxes in the form of excise duty, special excise duties, cess, VAT and CST among others gave way to a uniform rate, the ministry official said. He added that while vehicles attract the highest GST rate of 28%, this was still in the aggregate lower than the combined pre-GST tax incidence. Passenger vehicles also attract compensation cess ranging from 1% to 22%. “However, with compensation cess the taxes have not gone beyond pre-GST incidences except may be in few cases which were enjoying certain duty concessions (in the previous regime),” another official said.

In the last few days, executives at auto companies, including Maruti Suzuki, Force Motors and Toyota Kirloskar, have said high taxes on automobiles were restricting the sector’s growth by making the ownership of vehicles unattractive for consumers.

The country’s largest two-wheeler maker, Hero MotoCorp, has been pitching for a reduction of the GST rate on bikes and scooters to 18% from the top slab of 28% meant for luxury goods, in order to spur demand.

However, the officials quoted above disagreed with this view. “The tax policy for the sector has been quite consistent for the last three decades now in the form of allowing foreign investment and incentivising domestic manufacturing by providing reasonable protection from imports,” the second official said.

Despite protection from imports and lower import duty on auto parts, some auto companies have failed to thrive as a result of their (generous) offerings to consumers, the official said. “If the regulatory environment was not conducive, it would have been hard to imagine new players investing heavily into manufacturing facilities like Jeep, Kia Motors and MG, to name a few,” he added.

Contesting the view that tax rates for automobiles are high in India, the sources said across the globe, automobiles are is in the highest GST/VAT bracket. To cite an instance, in the EU, the base rate for VAT/GST on automobiles ranges from 20% to 25% with plotters of other taxes varying with jurisdiction.

The sources claimed that amidst the slump in production and demand in recent months, green shoots were visible in the auto sector. They referred to the Siam data and said that for the first time in many months now, the sale of passenger vehicles and two-wheelers surged last month.

While in August 2019 18.58 lakh units of two-wheelers were produced, in August 2020 the number rose to 18.59 lakh units. This is up from a mere 3 lakh units in May 2020. Similarly, in the passenger vehicles segment, against 1.89 lakh units sold in August 2019, August 2020 saw sales of 2.16 lakh units. Clearly, they said, after many gloomy months, the auto-sector is catching up. This trend would likely continue in coming months, they added.

Source : EconomiC Times