Cloud of dispute on higher GST demands from DGGI on auto components

The stage is being set for a showdown between the Directorate General of Goods and Services Tax Intelligence (DGGI) and automotive component manufacturers after the former raised tax demands that are far higher than what the GST structure prescribes. Some of the auto component manufacturers that have received these demands are getting ready to take the battle to the court, The Economic Times has reported.

While the component manufacturers have been paying GST at the rate of 18%, the tax authorities have contested and raised demands that are as high as 28%. In the past month and a half, the tax authorities have dispatched notices to at least 17 manufacturers. The amount of revenue mentioned in these notices is at least Rs 1,200, according to officials who are involved in the matter.

More letters with more tax demands are on their way to more manufacturers that would push up the amount involved.

Enginesm horns under lens
The items that are at the centre of the controversy are engines, horns, locks, sensing devices, LCD screens for dashboards, electronic components, switch panels, valves and lights.

A senior tax official told the newspaper, “Going by the supreme court order in the case of M/s Westinghouse Saxby Farmer, parts used exclusively for the auto industry have to pay higher tax and there cannot be two principles of taxation for the two industries.”

The apex court verdict quoted by the tax officials was delivered in 2021 in a matter related to Westinghouse Saxby Farmer which is a company of the government of West Bengal. It is a manufacturer of railway equipment that is eligible for lower rate of taxes. The argument is that the components should be classified in a way that they would be used exclusively for the railways.

To bolster their case, the authorities have also sought to reclassify the products to raise the rate of taxation on these products.

The argument of the tax authorities runs thus – parts and accessories of motor vehicles attract a GST rate of 28% and since these parts are made exclusively to be used in vehicles, these should be classified as such.

Experts had predicted that the Supreme Court order would have impact on the automotive industry since it would trigger reclassification exercise. Incidentally, the ruling in the Westinghouse Saxby Farmer case was beneficial for the railways and aviation industry. Experts have argued that the reclassification would follow from the fact that the apex court’s decision would get precedence over what the Central Board of Indirect Taxes and Customs had to say.

“While the ruling was not in favour of the tax authorities in the Westinghouse Saxby Farmer case, now they are using that judgement as a precedent for other instances,” said Kulraj Ashpani, partner at Dhruva Advisors.

Abhishek Rastogi, founder of Rastogi Chambers said, “For indirect taxes one of the most important principles is that specific entry prevails over general entry.” For example, specific classification of an engine would get precedence over “parts and accessories of motor vehicles”.

Experts are also of the view that these parts are almost exclusively supplied to manufacturers of automobiles who get input tax credit on them and companies paying lower tax do not impact the government’s coffers negatively.

Significantly, several companies are already paying GST at 28% even if they are included under lower rates just to avoid running to the courts.

Saurabh Agarwal, tax partner of E&Y told the newspaper, “The gap between the principles of classification of components and parts of a machine adopted by the Supreme Court and the instruction issued by the CBIC is causing severe challenges for the auto industry at large.”

Interestingly, in January 2022 CBIC had issued a circular saying that the SC verdict in the Westinghouse Saxby Farmer case should not be applied to wider matters.