GST Countdown: Why Automobile Dealers Are Staring At Losses Running Into Crores
Will sale of spare parts and repair transactions become expensive under GST?
Loss of credit on transition stock that is over a year old, increase in the working capital requirement, impact on trade discounts – automobile dealers across India are dealing with these challenges as they gear up for the July 1 rollout of the Goods and Service Tax regime.
On BloombergQuint’s special series, GST Countdown, John Paul, president of the Federation of Automobile Dealers Association, Vinkesh Gulati, partner at United Automobiles, and Saurabh Kedia, director at Kedia Group, shared their issues and posed questions to Ritesh Kanodia, partner at Dhruva Advisors.
Here are the edited excerpts:
What are some of the challenges that dealers are facing in Allahabad?
Vinkesh Gulati: The challenge is because of the inventory of old stocks of spares, accessories or even vehicles which are more than one year old. It’s not like the electronics market where you can give a 50 percent off and clear the stock. Auto spares and accessories are items which are more than three years old, and all the auto dealers not only in Allahabad but all over India are wondering what to do about those stocks? They see a direct 100 percent excise duty loss on that.
Is that something dealers in Kolkata are also struggling with?
Saurabh Kedia: I think what has happened is, the government has tried to devise policies in order to bring those who are non-compliant into the mainstream, and the auto industry is somehow suffering the brunt of it. They are already a very compliant business, and because of that all our stocks are already declared, and we are in the formal channel.
But the stipulation of more than one-year-old stock not allowed for input credit is hurting us very badly. There is a huge amount of money clogged in that. The hit is in crores, and the overall impact is going to be huge.
Is there a way for dealers to minimise this loss?
Ritesh Kanodia: The government has not given any relaxation on the one-year stock holding period. The rule says, if you have an inventory which is more than a year old, you will not get the credit. The only thing which I am not aware of is, the credit which you take on a 60-40 percent basis, will it be applicable even when you have an excise duty paying document in your hand?
So, till date the practice was that dealers were not issued an excise paying document, because they were not eligible to take any credit and they were really not concerned. What manufacturers or importers have started is, they have started paying them an excise paying document.
Also, there is a provision which is going to be introduced which is your credit transfer document (CTD). That is still in a draft stage but unfortunately that provision only addresses a manufacturer; not an importer. But my understanding is that it is being looked at. Now the question is when this credit transfer document comes in, the dealers can actually approach manufacturers and importers to take that CTD and take credit of excise duty. But will a dealer get credit for stock that is more than one year old if the dealer has the duty-paying document is still not clear.
Did you get any comfort from manufacturers or vendors from whom you source spare parts that, if at all, they will be able to shoulder some pain on the transition stock?
Vinkesh Gulati: It’s very clear that they will not be supporting us on the inventory stock. Also, from what I understand, on the stock that is older than one year, we won’t be able to get any credit. We will be losing a lot of money on that. Manufacturers are very clear that they will not be able to support us because they have already paid excise. And then they cannot support us in whatever losses we have due to that. Any dealer, any B-town dealer is normally carrying a stock of three crores of spares. You can safely assume one dealer would be losing around Rs 30 lakh and we have around 10,000 such dealers all over India.
Dealers issue free service coupon vouchers; also they get a booking advance – on both these, there is currently no tax incidence, but once GST comes in, the time of supply rules will come into play and GST will be applicable. How will this impact dealers?
Saurabh Kedia: The impact will be in terms of working capital, which will be even more going forward because we are staring at increased working capital limit requirement of almost 25 to 35 percent, depending on product category, area of operation, etc. We’re looking at maybe, at an all-India level, of maybe Rs 20,000 crore of increase in working capital, which will have a direct impact on the balance sheets as well as on the margins.
Vinkesh Gulati: The major effect that we are expecting is on trade discounts, which were not taxable before. The dealers are really worried that the manufacturer will reduce the discounts or the incentives and cover the GST from the dealers’ part of the deal.
Vinkesh Gulati: Ritesh, at workshops we sell spares and provide repair services as well. How should we treat a transaction that involves both?
Ritesh Kanodia: Actually, it is your call how do you want to charge. Because let’s say you do a composite billing which is typically a maintenance contract. And you say in the course of rendering my maintenance services, I’m going to sell you parts. If you make it as a composite contract which is naturally bundled, you can go by straight 18 percent because my essential dominant character is service. You would also have the option to go by itemized billing. But what would happen in an itemized billing is that you’ll have to see which parts come under 28 percent. Because let’s say you do composite, you charge 18 and you do 28 percent of the parts, there would be an accumulation. If you charge parts to parts 28, there is a loss to the customer because you are charging him 28 percent on the parts. So, there is some leverage opportunity where you have a good outflow, you can actually make a composite bundled maintenance contract, charge him 18, take 28 as the credit and use it to issue other liability. You would be able to reduce the customer’s maintenance cost.