The Indian Automotive sector had high hopes from the Union Budget 2017, however, the announcements made by the Finance Minister, Arun Jaitley have been disappointing. Expectations from the industry included restoration of weighted reduction on R&D expenditure, reduction of custom duties for components such as Lithium-Ion batteries which attract up to 70 percent tax as well as reduction of state levied tax on hybrid and electric vehicles and a lot more, but there were no announcements on the recommendations by various vehicle manufacturers as well as OEMs and industry experts. In order to promote ‘Make In India’ and ‘Skill India’, the Government did not announce anything substantial which was also expected to be a positive proposal by the sector. The only positive takeaway for the industry is the reduction of Customs duty on LNG (Liquefied Natural Gas) from five percent to 2.5 percent which anyway is not a large contributor for the transportation sector.
Due to the demonetisation of Rs 500 and Rs 1,000 currency notes from November 2016, the industry faced a considerable dip in sales during the said year’s end. Since some prospects purchase vehicles on ‘cash-down’ transaction after the ‘note ban’, dealers were unable accept such bookings as applicable tax would be levied on the dealers. That said, January 2017 saw a rise in sales as companies quickly transitioned from physical channels of payments (which included cash transactions) to digital channels of payment like e-booking of a vehicle. In addition, new introductions by some vehicle manufacturers kept the market sentiment high. (Maruti Suzuki Ignis and the Tata Hexa being the latest new car launches)
Why was reduction in taxes and better initiatives needed?
Electric vehicles and hybrids are still expensive to purchase and have been taking a huge hit owing to high taxation. Although there is partial relief from the Government’s FAME scheme, additional taxes in various states without any relaxation entails a higher initial cost which is borne by the customer. The reduction in taxes along with ease on R&D infrastructure would have enabled vehicle manufacturers to make these technologies cost-effective and helped in reaching an affordable price bracket eventually. In addition, manufacturers also emphasised on reduction of utility costs of components to attract more FDIs (Foreign Direct Investors), thereby also improving the export quantity. However, as stated by the Finance Minister, no changes to the excise and custom duties were done due to the implementation of GST (Goods and Services Tax) that will come into play from 1st April, 2016. The implementation of GST should create transparency of taxation and may reduce the burden of taxation on manufacturers if done right