Union Budget 2017 dashed auto sector expectations, yet there’s something to cheer about: KPMG India’s Waman Parkhi

While the automobile industry is one of the key drivers of India’s economic growth, accounting for 7.1% of the national GDP, it is faced with multiple issues and is struggling to cope up with the challenges in the light of demonetisation, which has resulted in slower growth of the sector in the November and December months of last year.

The automobile sector had numerous expectations from the Budget, such as streamlining of multiple tax rates (central excise), removal of multiple cesses, withdrawal of the National Calamity Contingent Duty (NCCD), guidance on issues relating to advertising, marketing and promotion expenses, use of AEs as tested parties, etc. However, the Budget has not brought much relief to any of the expectations by this sector. Special incentives for vehicle scrapping had been the demand of the sector for many years, which again was not heard.

You may also like to watch:

[jwplayer 3c4KKYB7]

However, increased focus on agriculture and rural sectors, and reduction in tax burden of individuals in the lower income segment could be positives for the sector, as these factors can lead to more disposable income and increased demand for two-wheelers and small cars. The focus on infrastructural sector, especially rural roads which are being built at the rate of 133 km per day as against 73 km per day earlier, and the proposed programme for development of multi-modal logistic operation by railways could indirectly help the sector.

Repealing R&D cess levied on import of technical know-how and subjecting the same to service tax will bring some relief to the auto sector, as the service tax paid will be available as credit. Import of technology will, therefore, become cheaper.

Keeping in mind the introduction of GST, the finance minister has not tinkered with excise duty rates and kept things simple on the indirect tax front. This will give the auto sector the much-needed time for preparing for GST. The minister hailed GST as a tectonic policy initiative and reiterated that it is a top priority for the government. This is a positive for the industry, which is one the most taxed sectors, and is eagerly awaiting for GST in the anticipation that it will bring in a simplified tax structure and address issues currently faced by the sector.

While the auto sector is grappling with slow markets post demonetisation, the amendments proposed in corporate tax may be additional dampeners, especially to dealer networks in rural areas. It is proposed to penalise acceptance of cash in respect of particular transaction from a person above Rs 3 lakh. Dealers and distributors would be required to collect higher taxes on sale of a motorcar if the buyer does not provide the Permanent Account Number (PAN).

Companies that were previously funded with excessive debt instruments and loans from their overseas group companies may suffer some dis-allowance, as rationalisation measures are now proposed to restrict deduction of such interest expenditure if it exceeds a certain threshold. Various MNCs preferred ‘debt’ over equity capital contribution as repayment of interest enjoyed lower tax rate of 5% in the hands of foreign companies.

A silver lining is, however, provided for companies covered under Minimum Alternate Tax (MAT) provisions (i.e. tax on book profits if normal tax profits are low), and the period of set-off of MAT liability against normal taxes has been extended by five years to 15 years. Also, rationalisations are proposed for companies that have adopted the Indian Accounting Standards (Ind-AS) to neutralise the impact of one-time adjustments on book profits.

On the transfer pricing (TP) front, there is something to cheer about while driving. The Union Budget has excluded payments made to certain specified persons from the definition of ‘specified domestic transactions’. This will provide great relief in terms of reduction in TP compliance burden and consequential scrutiny by tax authorities to the Indian automotive industry players, especially considering that there have been significant transactions of this nature, including payments to key management persons. At the same time, the requirement for such transactions to be at fair market value from the Income-tax Act continues.

To align to OECD TP guidelines and international best practices, it has been proposed that where there has been an adjustment to transfer price under specified scenarios, if such amount is not brought into India within the prescribed time, it may be treated as an advance given and warranting interest income in the hands of Indian taxpayers. This could be a bumpy ride for the transacting entity in other jurisdictions, especially if there is no deduction allowed for this adjustment. Also, various players in the automotive industry have already filed Advance Pricing Agreements, and would need to consider this requirement while negotiating with tax authorities. It is imperative that corporates revisit their operations and gear up for the changing Indian tax environment, one which increases accountability on tax administration as well as corporates.

Even though the Budget has not done much specifically for the auto sector, with the increased demand due to focus on agriculture and rural areas, simplified tax structure in ensuing GST, clarity in tax laws and efforts towards a robust tax administration, the auto industry is poised for better times ahead.

The author is partner, Indirect Tax, KPMG in India. Views are personal