Govt to weigh inverted duty structure concerns in case of GST cut on 2-wheelers

Meanwhile, sources told CNBC-TV18 that, “A cut for two-wheelers without a cut on components can lead to either paying of input tax credit to the companies or if government doesn’t want to pay credit then it will have to reduce the tax rate on components also, which will actually make the two-wheelers cheaper and boost demand.”

Implying that the government while assessing the proposal will weigh in the challenge that may come in the way of a cut in GST rates on two-wheelers alone and not on components and if yes, then this might lead to an inverted duty structure anomaly, which the government doesn’t encourage.

Currently, both two-wheelers and components are at 28 percent GST slab, but any reduction in rate on two-wheelers alone might lead to either a case of input tax credit refund, which the government has been discouraging.

“The two-wheeler manufacturers buying components at 27 percent and selling the final product for 18 percent or any other lower rate, will make the manufacturer eligible for an input tax credit. The government has been discouraging input tax credit payouts and thus has been advocating for a correction of inverted duty structure wherever it exists to ensure, industry and consumer get timey benefits of reduced rates,” sources added.

Another challenge, which sources hint at, is considering that components of two-wheelers are also used in some variants of cars, so how will government ensure that the components where taxes are reduced are used only for two-wheelers?

“A lot of components used for two-wheelers are used for higher variants of two-wheelers, which are considered luxury and some are used even in small cars, that too is a challenge,” sources added.

Currently, the GST rate on two-wheelers up to 350 cc is taxed at 28 percent, and GST on two-wheelers above 350cc attracts an additional cess, implying 28 percent plus 3 percent cess.

Also, when it comes to the revenue position, the expected revenue loss estimated alone on account of a GST reduction from 28 percent to 18 percent on auto components is pegged around Rs 30,000 crore/annum.

These estimates were made last year when the industry was pitching a reduction in GST rate for both automobiles and components. Let’s see how the government plans to take this proposal forward.