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New GST rules may increase prices of old vehicles, durables, smartphones
April, 04th 2017

After getting hit by the transition of new fuel technology — from Bharat Stage-III (BS-III) to BS-IV — the automobile sector in the country may be awaiting yet another shocker. The proposed taxation format under the upcoming goods and services tax (GST) is likely to fuel inflation, and increase the tax burden of secondhand car buyers and those opting for exchange offers. It may also increase the working capital of dealers of used vehicles.

Earlier the tax used to be calculated on the discounted value of a product in the case of exchange schemes after the market value of the old vehicle was deducted. The proposed GST rules, issued by the government on Sunday, will consider the market value of the new vehicle while calculating the tax burden. Thus, consumers may end up paying more as the discounted amount would be taxed.

Under the new GST rules, retailers and traders dealing in used vehicles will come under taxation. While under the existing rules, secondhand products are outside the purview of tax, sellers will have to pay taxes at the same rate as the new products.

According to Priyajit Ghosh, partner, indirect tax, KPMG in India, consumers may have to shell out more while buying used vehicles. “Under the GST, dealers are likely to pass on the additional tax burden to the consumers. However, bulk buyers may get some tax credit as invoices will include the taxed amount.”

“The new structure may increase the working capital of companies dealing in exchange schemes. While dealers who sell used vehicles within a month of buying them may not see the impact, delaying the process will increase working capital,” said Biren Vyas, partner, Grant Thornton India. Taking credit of the purchase tax in the same month will help them keep a check. The resellers market in India is currently pegged at 3.3 million units a year.

According to experts, since the current tax rules do not apply to the discounted value in the case of exchange of old vehicles against a new one, the tax paid remains lower. However, under the GST regime, income tax credit against the discounted value will not be recoverable.

“According to our preliminary assessments, the new rules are in line with the existing ones,” said Sugato Sen, deputy general manager, Society of Indian Automobile Manufacturers. Various automobile manufacturers in the country that this newspaper got in touch with said they are currently assessing the impact of the proposed rules.

Manufacturers of consumer durables and smartphones are cautious of the impact the new rules may have on prices of their products. While a majority of the automobile manufacturers own large dealerships, the consumer durables makers are, however, less affected. The impact here will have to be dealt by retailers and dealers, who usually run the exchange schemes.

According to C M Singh, chief financial officer, Videocon, exchange offers constitute a mere one per cent of the total sales for major manufacturers of televisions, refrigerators, air-conditioners and washing machines. “Exchanges are mostly dealt at the dealer level. We don’t see any impact for us,” said Kapil Agarwal, vice-president, Whirlpool India.

Exchange schemes cover almost a fifth or 20 per cent of the products sold in the consumer electronics and home appliances space in the country. “Since the dealers get better prices for these secondhand products from third-party buyers of consumer durable items than what they get from manufacturers like us, they usually do not sell these items to us. So, it is on them now how they channelise the excess cost arising out of the increased tax under GST,” said a senior executive of a major consumer durables manufacturer.

Thus, most of these consumer durables manufacturers are less affected by this new norm. It is the dealers, retail chains and e-commerce players who may land in trouble.

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