Auto: A Tricky Situation
Apprehensions and reluctance have always accompanied any reform of monstrous proportions. GST, too, has brought in its share of chaos, especially to India’s auto sector, which is set to see a massive turnaround after 1 July when the Bill comes into play. The sector is still in prep mode and, in fact, there are still a “few players who are not yet ready” for this transition.
“Like always, some players have not updated their systems to comply with the new reforms. However, we are fully prepared,” a top executive in the industry says.
It is worthwhile to note that some automakers were not ready either during the recent BS III to BS IV transition and had to offer heavy discounts to clear their inventory. Industry insiders also say that there should have been more clarity on GST and the taxation dynamics.
Similar to the BS IV transition chaos, automakers are offering discounts again now to clear the inventory while dealers are not receiving them fearing losses. On the other hand, consumers are postponing their purchases anticipating further fall in prices.
Auto sales may decline as much as 8 per cent in June, because of GST, the third hurdle in the sector’s growth in the span of eight months, the other two being demonetisation and BS IV transition.
According to industry estimates, there is an unsold inventory of more than 3 lakh vehicles. “In a bid to lower losses, carmakers are giving discounts to clear the unsold inventory before 1 July,” says one auto executive. “Wholesale numbers may come down by 6-8 per cent in June,” says another executive.
Auto dealers are also in a tricky situation because of unpreparedness. Here’s why: The dealers can claim only about 60 per cent input tax credit on unsold pre-GST stock held until then, while they would incur a loss to the extent of the balance 40 per cent credit. A few automakers have announced that they will partially bear GST-related losses borne by the dealers.
Access to the tax structure in dealership in smaller towns is also posing a hurdle for a smooth transition of GST implementation. Subrata Ray, SVP and Group Head of credit rating firm ICRA says, “A major hurdle here is the tier 2/3/4 vendors having necessary IT infrastructure to ensure smooth transfer of tax credit across value chain.” Moreover, several OEMs as well as tier-1 vendors have setup units under the state government industrial promotion scheme, from which arrears related to VAT refund are pending. Timely recovery of subsidy receivable is another key focus area under the GST regime.
The government’s reluctance to change the set rate for hybrid vehicles is another area that needs focus. This signals that the concerned parties should discuss the subject more before finalising the rates.
Toyota Kirloskar Motor has sold over 10 million hybrid vehicles globally till now. “We think that such technologies can be an appropriate mobility solution for countries such as India. However, instead of hybrid, the government has started giving more thrust to electric vehicles,” says N. Raja, SVP and Director (Sales & Marketing) at Toyota Kirloskar Motor.
Reports have also come in saying Toyota will revisit its plans of introducing new models in India if the government does not reduce the GST rate on full hybrid cars. “Currently, there is no differentiation in tax structure for a mid-size car, mild-hybrid and full-hybrid (plug-in hybrid), which should be addressed by the government,” adds Ray.
