Wanted: A Budget that plays straight for auto

Over the years, the Indian auto sector has attracted investments from various parts of the world.  While this sector witnessed a slowdown last year and the projected increase in growth for the current year is not substantial, the potential of the sector to contribute to the economic growth and continue attracting global investments cannot be ruled out.

One of the cardinal ways in which its strength may be preserved is strong tax reforms.  Budget is, therefore, the most awaited event the industry looks forward to for the government’s support.  Here are some of the key items on the industry’s wish-list this year.

In the forthcoming Budget, one of the biggest worries of diesel vehicle manufacturers is the proposal of the government seeking to levy additional excise duties on diesel cars/utility vehicles. Such an additional duty/ cess may be a specified amount for each vehicle manufactured or a specified percentage of value.

This will result in an immediate price hike for diesel-driven vehicles. Price competitiveness being one of the key decision-making criteria for buyers, customer base may likely shift back to lesser fuel efficient petrol-run vehicles and thus, seriously impacting the production of diesel ones. The industry hopes that such a tax/cess is not introduced and the duty structures are kept favourable for diesel-run vehicles.

For motorcycle and car manufacturers, what would imply completely knocked down (CKD) goods — which attracted reduced Customs duty — was always a matter of debate. With a view to putting this issue to rest, the last Budget amended the provisions wherein a reduced Customs duty rate was provided for CKD kits containing imported engine, gearbox and transmission mechanism which are not in a pre-assembled form.

However, this clarification created controversies as to what would be interpreted as a pre-assembled form. The car/ motorcycle manufacturers were heavily impacted due to this ambiguity and the government could bring in clarity on this aspect to avoid any further litigation. 

For imports from related parties, at times, transfer pricing authorities and the special valuation branch of the Customs seek to have conflicting views, leading to ongoing litigations and additional tax/duty outflows for the assessees.

To curb this, the government may propose introduction of an approach that is mutually acceptable to both these levels of administration.

The industry each year has been looking forward to steps being taken for introduction of the goods and services tax (GST).  However, the proposals of hiking the excise duty rates from the current 10% to 12% would not be in accordance with the GST theme of aligning the integrated GST rate to 16%.  Accordingly, the industry hopes for the current excise duty rates to be maintained. 
One critical area to look forward to in the Budget would be amendments/clarifications in Cenvat credit rules in light of credit rollbacks last year.

The restrictions imposed by the previous Budget impacted the industry at large and favourable clarifications/provisions could hasten credit flow throughout the manufacturing cycle.

Increase in disposable income of individuals in the lower/middle income groups by restructuring the I-T slabs could lead to a jump in demand for vehicles, especially that of two wheelers. 

As a positive move towards attracting global investments to India in the auto sector, tax sops for research and development centres of auto manufacturers being set up in India would be a welcome move. Such tax incentives could be in the form of NIL/concessional duty rates on imports for the purpose of setting up such R&D centres.

To avoid any misuse, the government may also prescribe suitable safeguards/monitoring methodologies, along with granting such incentives.

Taking the point on development of auto sector in India further, steps towards setting up of auto manufacturing zones and providing fiscal incentives — in the form of reduced tax rates, soft loans — would boost the overall contribution of this sector to the GDP. 

This would also lead to higher employment opportunities. As an extension, the introduction of the National Manufacturing Policy last year envisaging inter alia national investment and manufacturing zones was hailed by the industry across the spectrum and specific provisions/guidelines for implementation of this policy are awaited.

In summary, a strong Budget that supports the auto sector at large and brings in clarity on existing anomalies in law will be welcomed by the industry.

The writer is tax partner, Ernst & Young. (Sonal Jain, senior tax professional with a member firm of Ernst & Young Global, also
contributed to the article.)
Views expressed are personal