1. Budget 2017 & Auto industry: Why govt must boost consumption, put more money in hands of consumers

Budget 2017 & Auto industry: Why govt must boost consumption, put more money in hands of consumers

A perennial problem of the industry has been the high tax burden

Updated: January 19, 2017 11:13 AM
The industry in India is, however, extremely competitive and its fortunes are influenced by a variety of factors, such as monsoon rainfall, rural consumption and demand, interest rate scenario, commodity prices and, last but not the least, the tax and regulatory policies of the government, many of which form a part of the Budget. (PTI) The industry in India is, however, extremely competitive and its fortunes are influenced by a variety of factors, such as monsoon rainfall, rural consumption and demand, interest rate scenario, commodity prices and, last but not the least, the tax and regulatory policies of the government, many of which form a part of the Budget. (PTI)

The importance of the automobile industry for the Indian economy cannot be overemphasised. The industry contributes—based on the currently available statistics—approximately 7.1% of the overall GDP and approximately 49% of the manufacturing sector GDP. It is a key employment generator and is estimated to support employment of more than 32 million people, directly or indirectly.

The industry in India is, however, extremely competitive and its fortunes are influenced by a variety of factors, such as monsoon rainfall, rural consumption and demand, interest rate scenario, commodity prices and, last but not the least, the tax and regulatory policies of the government, many of which form a part of the Budget.

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The Union Budget, slated to be presented on February 1, 2017, will undoubtedly be of great importance to the automobile industry. The recent demonetisation, beyond question, had very good and larger objectives, but apparently has had a negative impact of the sales numbers in the short run. Besides this, the ban on sale of above-2000cc diesel vehicles in the Delhi NCR region has also impacted the sales for the automobile industry.

The industry—from the macroeconomic perspective—would be looking forward to a Budget which gives a boost to consumption, which is not inflationary, which is positive from a low interest rate scenario perspective, and which leads to reduction in personal income-tax rates and other tax incentives, putting more money in the hands of the consumer.

A perennial problem of the industry has been the high tax burden to which it is subject to. The industry currently has five rates of excise duty applicable—6%, 12.5%, 24%, 27% and 30%. Additionally, vehicles attract R&D cess, National Calamity Contingent Duty (NCCD), infrastructure cess, value-added tax (VAT) and central sales tax (CST). Overall, the tax incidence on a vehicle is to the tune of 30-32% for a small car and 50%-plus for a big car. The GST regime is expected to subsume the multiple cesses and levies, and rationalise the tax rates. The industry would expect that the Budget would be a precursor to such a simplified tax regime.

Another area of interest would be corporate tax rates. The finance minister has spoken about lowering of corporate tax rates, and it is expected that the Budget would have some provision to this effect. Tax and other incentives for the ‘Make in India’ initiative are also expected. The previous Budget introduced the provisions for Tax Collection at Source (TCS) on sale of motor vehicles for value exceeding R10 lakh. The industry has submitted that these provisions be abolished or, at least, relaxed. Representations have also been made to increase the rate of tax depreciation allowable from 15% to 25%.

On the regulatory front, the industry has made representations for introduction of an appropriate vehicle scrappage or fleet modernisation policy, given the expected overall benefits from the same. Any announcement or incentives in respect of such a policy would be awaited. Subsidies or reduced duties for environment-friendly vehicles are also expected.

Overall, the industry will look forward to a positive and growth-oriented Budget, with a focus on industrial and infrastructural development, ease of doing business, and which is a precursor to the much-awaited GST regime.

The author is Dinesh Supekar, partner, Price Waterhouse, and an auto expert.

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