High GST on auto parts lead to working capital shortage, tax evasion by SMEs
Small and medium companies in the auto components business are facing working capital shortage post-GST implementation, due to the high tax rates on certain components and lower input tax credit (ITC) claim option, which has led to a higher output cost.
Besides, high rates on various components have led to tax evasion by multiple players, although the process of taxation has streamlined post-GST, the companies said.
While the government, since July 2017, reduced the GST on some auto components at flat 18 per cent, about 40 per cent components have been kept at a bracket of 28 per cent.
“ITC for the SMEs on 18 per cent translates to a higher output cost, which are hurting the small companies and the requirement for working capital has increased due to delayed payment by the client," Sunil Arora, managing director of Abilities India Pistons & Rings told ETAuto. The company makes pistons, piston rings and castings.
Under the GST regime, a component maker has to set aside 28 per cent of the proceeds from his component sale but can claim input credit only to the level of 18 per cent, thereby leading to higher tax outgo.
Although it is the OEM, which bears the tax burden, but the concern with SMEs is that the payment from clients takes about three months, leading to a working capital shortage.
Arora said due to these long-standing issues, tax evasion of lakhs of rupees are happening in various parts of the country, where thousands of SMEs operate.
Ayush Lohia, CEO of Lohia Auto Industries said although the demand has not gone down due to the excessive need of components in the industry, it is the companies facing problem due to high taxes on various components, especially of electric vehicles, among others.
Demanding for a lower and flat tax rate on companies with a turnover of up to Rs 250 crore, Arora, who is also the deputy chairman of ACMA (Northern Region) said, there are thousands of small companies, which are evading taxes using the fake bill system.
On the electric vehicle components, Lohia said the components for the EVs such as electric motor, charger and battery products, among others, have been taxed in the range of 18-28 per cent, which needs to be brought down to drive demand.
He further added, at a time when the government is promoting eco-friendly vehicles, the components should be taxed less so that the manufacturers have the ease of making these products.
Lohia explained if the tax on electric vehicles is 12 per cent, it does not make sense to tax the components at even higher rates.
At the same time, Arora said, out of the 800 companies that are part of the ACMA, 80 per cent are small companies with the turnover of less than Rs 250 crore. Overall, there are about 15,000 small companies in the country in the components space.
Traders are also complaining about the high GST rates, saying the 28 per cent tax is mostly levied on items that have more demand in the market, and therefore, the prices have increased significantly, affecting the sales and increasing duplicacy of products.
Experts are of the view that lower tax on components will be helpful in offsetting the high price of vehicles, especially luxury cars, thereby increasing the sales.