Carmakers seek relief from paying GST on advances

MUMBAI: Carmakers Maruti SuzukiBSE -0.12 %, Tata MotorsBSE -1.42 %, Hyundai or Mahindra & Mahindra (M&A) could see an impact on their cashflows after the introduction of the single producer levy as the Goods and Services Tax (GST) now requires companies to pay tax on the advances received. For marquee names, the complication is that they are liable to pay GST on advances as soon as they receive them, unlike provisions under the earlier tax framework.

Some of the major automobile companies have approached the government on the subject, claiming the change would add an extra variable to their operations. "We are in discussion with the government authorities to smoothen the operational issues leading to the successful implementation of GST," a Maruti Suzuki spokesperson said.

Maruti Suzuki, Tata Motors and M&M refused to comment on ET's specific queries on the likelihood of complications arising out of the new provision.

Tax Credit Timing Mismatch

Experts point out that according to the existing GST Law, tax has to be deposited with government on month-end closing balance of advances received (amount received during the month but goods not invoiced until month end).

"A seller would be required to deposit GST but buyers would not be entitled to get input credit of the same. Thus, this is very clearly an unfavorable rule resulting in blockage of funds," a top executive with an auto major told ET. Carmakers are set to face this issue around the first week of August, when they are required to file GST returns.

  

 

"This would be treated as an "advance payment of tax' and the same would be adjusted at time of actual invoicing," another executive with a major automaker told ET.

To be sure, some tax experts said that the impact may be limited.

'Limited Impact Seen'

"Under the earlier tax regime, no tax had to be paid on advances. Under GST, the seller will only get the net after the tax deductible. But I don't think it would significantly impact the cash flows of companies selling the product," said Sachin Menon, national head of indirect tax at KPMG.

Industry trackers say that auto companies would be required to pay tax on customer advances, and this will not only impact their cash flows but also complicate their credit process. Under GST, the way advances are treated has changed since tax is also paid on the advances.

"Earlier, while advance for services were taxed, now even advances received for supplying goods are liable for GST. However, the input credit is only available to customers when goods or services are actually received," said Pratik Jain, National Leader - Indirect Tax at PwC India.

"For advances outstanding as on June 30th for goods/services that were earlier exempt but now subject to GST, it could lead to complications. Along with cash flow issues, GST on advances also entails additional compliances of issuing a prescribed document and reporting. It could require a few companies to re-look at their current business models," Jain said.

Apart from an adverse cash flow effect, GST on advances would create a lot of administrative difficulties, say automakers. "Because most of the companies keep a single account of each buyer (for all products and locations) whereas GST rate differs for products," an executive with a top auto company said.

Small cars attract a 29% levy, compared with 43% for large cars. "If you call it a deposit or booking fee instead of an advance, it may escape complication. But not many auto majors may want to do this," a tax expert said.

ET View: Ease Complianc

This is not surprising. Businesses were expected to face inventory, logistics, budgeting and working capital issues as they moved to the new regime. The GST Council should find swift ways to resolve sectoral problems including those faced by automakers that would have wider ramifications for the economy as a whole. Easing compliance is pragmatic to avert any slowdown in sales. The wheels of the economy must move.

Source::: The Economic Times, dated 15/07/2017