Friday, November 3, 2023

Navigating the GST Maze: How Auto Companies Use Their Own Vehicles


The Indian automotive sector is a key driver of economic growth and innovation, contributing about 15% of India's GST collection. However, this industry has faced several challenges over the years, including financial troubles, economic slowdowns, and the impact of COVID-19. In this article, we will explore a specific issue within the auto industry - how companies use their own vehicles and the tax implications of this practice.

Using Their Own Vehicles: Auto companies often use vehicles they've manufactured for their own purposes, whether inside their factories or as part of their business operations. Before we dive into the tax aspects, it's essential to understand that these vehicles need to be registered with the Regional Transport Office (RTO), just like any other vehicle. This process involves submitting various documents, including a sales certificate (Form 21), insurance details, and address information.

How It Worked Before GST: In the past, under the old excise tax system, taxes were paid when goods were manufactured, and they were collected when the goods were removed, even if it wasn't a sale. This meant that taxes were paid when the vehicles were registered for company use.

Uncertainty with GST - Key Challenges: The problem under the current GST system is that we're not entirely sure if taxes should be paid when registering these vehicles. The reason for the confusion is that, during this self-transaction, there's no real sale involved. Form 21, which is used for vehicle registration under the Motor Vehicle Act, doesn't mention anything about a GST tax invoice. So, some argue that there should be no GST on this self-supply.

Input Tax Credit (ITC): When auto companies make these vehicles and use them for their business, they can usually claim ITC, which is like a credit for the taxes they've paid. However, there are some recent rules that make it a bit tricky. One of these rules says that you can only claim ITC if the invoice details are on record in your GST returns and match what the supplier reported. Since auto companies usually use self-invoices for these vehicles, they might not meet these criteria, making it harder to get ITC.

Selling Used Vehicles Later: Auto companies often sell their own vehicles after using them for some time. When they do this, there are two options:

  1. If they didn't claim ITC on the materials they used to build the vehicles, they might have to pay GST on the difference between the selling price and the original cost.
  2. If they did claim ITC, they have to pay GST on the full selling price.

Most auto companies choose the first option, but it can lead to disagreements with tax authorities who might insist on the second option, saying that the earlier taxes paid during registration don't count as ITC.

Conclusion: The Indian auto industry has faced challenges, including COVID-19 and rising costs, which have affected its growth. The current way most major auto companies handle GST adds an extra cost, impacting their finances. There are two ways to resolve this - one suggests paying taxes when registering and later when selling, while the other follows the old method. For the sake of clarity and to avoid legal disputes, a clear explanation from the GST council is needed. Understanding the tax rules for self-used vehicles and used vehicle sales is crucial for the industry's growth and stability.