The automobile industry is very important for the Indian economy, given its significant contribution to the national GDP, and the employment it generates directly and indirectly. After two years of sluggish growth, the fortunes of the industry seem to be changing. The latest forecast shows growth in almost all the segments, aided by falling oil prices and softening interest rates. The industry now expects certain positive announcements in the forthcoming Union Budget to further boost its growth prospects.
A long-standing grievance of the industry is the multiple taxes it is subject to. Reports suggest that for every R100 collected from the consumer, the government collects excise duty, sales tax, road tax, service tax, etc, of R56 for small cars and R82 for big cars. Multiplicity of taxes combined with an inverted duty structure in some cases also results in accumulated credits and cumbersome compliances. Therefore, of particular interest would be a clear roadmap towards the goods and services tax (GST), which will subsume multiple taxes and facilitate seamless tax credits. Till such time the GST is implemented, the industry would hope for a reduction in some of the existing taxes. For instance, the concessional rates of excise duty which were prevailing till December 31, 2014 (and which have since increased), have benefited the industry and a reduction in the rates to the earlier levels will no doubt help volume growth and better capacity utilisation.
The industry is also expecting reduction in the CST rate from 2% to 1%, and withdrawal of the National Contingent Calamity Duty (NCCD) of 1%. The NCCD is levied on a few products including cigarettes, bidis and pan masala, and the industry believes that it would not be equitable for it to be clubbed with this category of products.
Transfer pricing adjustments and associated litigation has been another bugbear. Transfer pricing litigation has largely arisen because transfer pricing officers attribute losses/inadequate profits to related party prices. The finance minister has mentioned in public forums about the desirability to reduce tax litigation, and any relevant policy announcements would be keenly awaited.
In the first Budget of the new government, certain welcome changes in the transfer pricing regulations were proposed; for example, use of multiple year data for comparables, the concept of ‘range’ instead of arithmetic mean for computing arm’s length prices, and APA rollbacks. The relevant legislative provisions, however, need to be announced and operationalised. Announcements in this respect, including specific provisions to curtail transfer pricing/tax litigation, would be keenly awaited. Further, it is often seen that for the same case there is a gap between transfer prices as assessed by customs authorities and by income-tax authorities, with two different arms of the government working at cross-purposes. Establishment of a common assessing authority, along with clear guidelines on key issues, will help in reducing uncertainty and litigation.
Another relevant area is policy announcements or specific measures regarding the ‘Make in India’ initiative, especially measures to boost the development of physical infrastructure (ultimately cars need good roads to run on!), and a balanced business-friendly labour legislation. Also, increase in individual disposable income, by reduction in personal tax rates, or increasing the basic personal tax exemption limit, should improve the demand in some segments—such as small cars and two wheelers—and would be welcome. Increased depreciation on motor cars from the current rate of 15% on written-down value (WDV) is also being represented for, on the basis that the prevailing depreciation rate does not reflect the correct useful life of a motor car.
The expectations of the industry from Budget FY16 are high, especially since this would be the first ‘proper’ Budget of this government. India has not been an easy market place for most automobile MNCs, but the overall macro-economic environment seems to be favourably changing for the industry. The growth potential for the industry in India is huge and, hopefully, the coming year should be one of the best times for companies to reassess their India strategy and develop plans for profitable growth.
The author is partner, Price Waterhouse & Co LLP. Views are personal