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GST Bill Poised to Fuel the Growth of Indian Automobile Sector

The current tax framework in India complex in nature. Multiple taxes levied by the Central and State governments result into cascading of taxes in the country. With an objective to simplify the tax structure and make 'One India' by removing geographical fragmentation, the Constitution Amendment Bill for Goods and Services Tax (GST) was passed in the Rajya Sabha on 3rd August 2016. With the passage of the GST Bill, the Government is committed to replace all the indirect taxes levied on the goods and services by the State and Centre Governments by April 2017. The GST is anticipated to impact the tax structure, tax computation, and credit utilization thereby, resulting in rejuvenating the entire tax mechanism.

It is anticipated that implementation of GST would impact the automobile sector positively. Key reasons for the same can be accounted to eradication of cascading of taxes and expected increase in the efficiency of value chain. Post implementation of GST, geographical differences would be eliminated from the prospective of indirect tax which in turn would reduce the compliance burden.

The GST is anticipated to be implemented with a tax range of 17-19%. In case, the proposed tax rate is accepted, the price of automobiles would witness a decline by 8-17% depending on the vehicle category. Expected decline in the price of vehicles is likely to trigger the demand of vehicles in the country, thereby supporting the increase in the automobile production. Moreover, it is anticipated that automobile export would become more competitive resulting in higher production of automobiles.

On the other hand, the GST framework possess few ambiguities pertaining to the automobile sector. One of the major ambiguities is the vehicle manufacturing incentive by the several State Governments. Automobile manufacturers need to invest substantial corpus in order to setup production facilities.In current scenario, several states such as Tamil Nadu, Gujarat, and Maharashtra offer tax incentives to the vehicle manufacturers. The incentive benefits offered by the State Government is underpinned by quantum of Value Added Tax (VAT) and Central Sales Tax (CST). The provision of incentive is unclear with passage of the GST. Hence, the automobile manufacturers need to renegotiate the terms and conditions of the Memorandums of Understanding (MoU), which they have inked with the incentive offering states.

Moreover, credits on vendor tooling has emerged as another key challenge for the automobile sector of India. As a common practice in the automobile sector, the OEMs procure tools/moulds for vehicle parts from the vendors. Usually, the OEMs take up the ownership of such tools and pay the vendors. However, such tools are physically placed at the factory of the vendors for manufacturing of the vehicle parts. As per the Model GST law, the capital goods are defined as the goods which are utilized at the place of business of supply of goods. As a consequence, the only goods which are utilized at the business place of the OEMs are qualified for the GST credit by the OEMs. It is anticipated that this definition would act as a restraint for the OEMs in availing credit pertaining to the tools located the premises, on which the vendors recover the cost. This is likely to increase the cost of tools and hence, the cost of vehicle manufacturing.

TechSci research depicts that implementation of GST would positively impact the automobile industry of India, by eliminating the cascading effects of taxes. Reduction of taxes is likely to trim down the price of vehicles, which is anticipated to boost the demand for automobiles in the country.

Expected growth in the automobile sales, vehicle fleet and favorable government policies are poised to drive automotive components market over the years to come. The GST is anticipated to will convert Indian market into one common market providing greater ease of doing business and higher savings of transportation costs for the auto components.

Further, expected increase in the automobile demand is likely to fuel the tire industry of India over the coming years. With more than 60 tire manufacturing plants spread across the country in 2015, India ranks among one of the largest tire markets in the world. Growing automobile sales coupled with expanding automobile fleet are the major factors boosting demand for tires in the country. Moreover, with favorable inflationary scenario, expanding middle class population and increasing national disposable income, tire sales across all the automobile segments are expected to grow in the coming years. Presence of major automotive OEMs such as Ford, Hyundai, Honda, Mahindra, Maruti Suzuki, TATA, BMW, etc. has been hugely contributing to the sales of tires in India. MRF, CEAT, Birla Tyres, TVS Srichakra, Apollo Tyres and JK Tyre are few of the major regional tire manufacturers, while the major international tire brands operating in the country includes Goodyear, Bridgestone, Michelin, Continental, Yokohama, and Hankook.

According to a report published by TechSci Research, India Tire Market Forecast & Opportunities, 2021’’, the country’s tire market is forecast to witness a CAGR of over 9% during 2016-2021. Though, the replacement tire demand had a majority share in 2015, the OEM tire demand is expected to outpace replacement tire demand during 2016-2021. In 2015, Northern region accounted for the largest share in India’s tire market, followed by Southern, Eastern and Western regions of the country. Over the next five years as well, Northern and Southern regions are forecast to continue their market dominance and grab a cumulative market share of nearly 59% in 2021. Two-wheeler tire segment, which accounted for a volume share of over 50% in the country’s tire market in 2015, is also expected to maintain its position as the largest tire segment over the next five years.        

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