The new tax collection-at-source rule is so absurd that it might actually be a language mistake

As per industry executives, a new rule is going to make tax collection at source (TCS) compulsory, even when a vehicle costing 10 lakh or more is sold in the second-hand market. This has confused the automotive industry to no end.

The reason behind this confusion is that the rule was originally expected to cover only new passenger vehicles; however, the rule that has been approved as part of the Finance Bill covers all types of vehicles. It will come into effect on June 1.

It was in his budget speech that the finance minister had proposed to collect a 1% tax at source on luxury cars that were priced above 10 lakh, saying that it would be levied on the ex-showroom price from the dealer’s end, which would then be paid it to the government. This payment was also said to be able to set off against the total tax liability of the buyer.

"From the budget speech, it was perceived that it would be implemented only on passenger vehicles priced above 10 lakh, but what has come prima facie in the language of the approved budget (Finance Bill 2016), it seems that TCS is applicable on all types of motor vehicles including trucks, buses, two-wheelers and cars sold by manufacturers, exports, dealers and government," said Sugato Sen, deputy director-general of the Society of Indian Automobile Manufacturers.

The Finance Bill reads, "Every person, being a seller, who receives any amount as consideration for sale of a motor vehicle of the value exceeding 10 lakh, shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 1% of the sale consideration as income-tax."

Until further clarified, this means that even an individual selling his old vehicle for above 10 lakh will have to collect 1% of the value from the buyer and pay it to the government, while purchasing parts for 2 lakh or more will also attract this tax provision.

Sen feels that there is a possibility of a language error in the Bill. "We have sought a clarification from the government and hope to meet them (government officials) soon," he said.

However, this is not where the confusion ends.

"From the budget, it was thought that it (TCS) will be collected from the end customers only. But now, it will be collected from the dealers also," said Nikunj Sanghi, former president of the Federation of Automobile Dealers Association. He added, "The biggest problem for us is that we will have extra burden on working capital."

Automobile manufacturers are of the view that this new tax rule would further complicate business transactions, while there were promises from the Modi government that doing business would be made easy.

Under this rule, manufacturers would deposit TCS on behalf of dealers, who could adjust this payment against their income tax. Similarly, dealers would have to collect tax from buyers and deposit that in their names. This tax would be adjusted while the vehicle buyers pay their income tax.

Rakesh Batra, national leader-automotive at consultancy firm EY, called this an administrative burden on both manufacturers and buyers, while also forcing customers to put a little more cash in advance, given that no financing company won’t fund this.

As of now, when you buy a vehicle, you have to pay for excise duty, central sales tax, R&D cess, education cess, value-added tax, Octroi/entry tax, national calamity contingent duty, road tax and Swach Bharat cess. Besides, the insurance cover also forces the buyer to pay Krishi Kalyan tax, service tax and Swachh Bharat cess.

Another burden on manufacturers, dealers and buyers is certainly uncalled for, feels the automotive industry.

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