Budget 2018: Expectations of the automotive sector
Gaurav Karnik, Tax Partner, EY
The automotive industry in India is one of the prime drivers of the Indian economy. It accounts for around 7% of the country's gross domestic product (GDP) and there are 23.9 mn vehicles in India, which includes passenger vehicles, two-wheelers, commercial vehicles and three-wheelers. On the other hand, the auto industry provides direct and indirect employment to over 29 mn people in India. However, the Indian automotive industry is facing testing times due to factors such as policy changes relating to diesel automotive, implementation of GST, etc. Given the challenges faced by sector, the auto sector is looking forward for support from the Government to provide further boost to the industry through Union Budget 2018.
In keeping with Government initiative of Make in India, the rate of depreciation on capital goods be increased to 25 percent from existing 15 percent so as to enable replacement of obsolete equipment and allow state of the art equipment be used for making India a manufacturing as well as export hub for automobile industry. In addition, R&D being an integral part of auto industry and key factor for enabling manufacturing and innovation in India, weighted deduction on R&D expenses should be extended to expenses incurred towards third party R&D service providers to encourage local designing of products. Further, with automobile manufacturers investing heavily in R&D in order to upgrade to BS VI emission standards, e-mobility among others, there should be restoration of incentives on R&D in form of weighted tax deduction from 150% to 200% in Budget 2018. To further boost the Make in India program for the automobile sector, it is hoped that current corporate tax rate is brought down to 25percent and at the same time provisions relating to Minimum Alternate Tax are rationalised and rate is also reduced.
To incentivize the companies to generate more employment, the benefit of deduction for additional employment benefits which is currently available only if the employee completes 240 days in a financial year should extended to the year in which the employees complete the prescribed threshold period of employment. To boost demand and keeping environment concerns in perspective, Government should provide a scheme which could be in the form of tax incentive/ cash support to existing vehicle owners to give up their old vehicles (aged 10 years/ 15 years or more).
From an indirect tax perspective, custom duty at a uniform rate of 10% for all auto components in lieu of the current regime different rates on different components and the countries of origin would be welcome. In regard to rates of GST, currently the auto components attract two different rates- 18% and 28% which is around 2.5 – 3 times the rate when compared to other emerging & developed markets. Though some relaxation has been given on auto components after the recent GST council meeting, still 40% of the auto components attract higher GST rate of 28%. This will cause adverse impact on sale of genuine parts thereby encouraging growth of grey market. Uniform GST rate of 18% across all product categories in the auto component sector would be welcome step to address this issue. To avoid blocking of capital, inputs procured for manufacture of goods to be exported, should be without payment of GST as it was allowed earlier in the central excise law. In addition, input tax credit should be allowed on the free samples given as part of promotional schemes. Most of the auto component manufacturers are SMEs and payment of GST without input credit on the distribution of free samples/supplies restrict them to adopting new technology/auto components
For electric vehicles (EVs), there should be an extension of custom duty concessions for additional critical components such as lithium-ion batteries, electric motors, etc. Further the GST on such automobiles should be reduced to 5%, besides one time income tax deduction of 30% of vehicle price for non-financed buyers. To support 'Make in India' programme any custom duty concessions to CBUs (completely built units) of electric vehicles may be reconsidered and at the same time there is a need to clearly provide definition of CKD (completely knocked down)/ SKD (semi-knocked-down) units of electric vehicles.
The Government in keeping with its commitment to climate change and environment had announced a Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India (FAME India) Scheme: The Scheme aims to encourage faster adoption, domestic technology development and manufacturing of full range of cleaner electric vehicle technologies, thereby leading to creation of a strong, globally competitive, viable & self-sustaining EV industry and its eco system in India. Given that the industry is putting significant focus on developing world class EV and Hybrid vehicles suited to Indian markets, the Government should increase budget allocation under FAME 2 to promote green mobility.
Given the importance of the automobile industry to the economy and in particular employment, it is hoped that Government takes into the above asks and acts upon it in a positive manner for the sector.
(The author is Tax Partner, EY)
(This column first appeared on the Economic Times website)
(Views expressed are personal)