FM must take front seat to drive auto sector’s growth agenda

Feb 23 2013, 03:51 IST
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SummaryThe Union Budget 2013 will be presented at the time when the Indian automotive sector faces an uphill task in recovering its growth momentum.

The Union Budget 2013 will be presented at the time when the Indian automotive sector faces an uphill task in recovering its growth momentum. The strong comeback story of the automotive sector in 2010 and 2011 was followed by a tepid growth rate in 2012 and the performance in fiscal 2012-13 looks no different. In recent times, where India has successfully announced its potential to host the world’s costliest auto sport, Formula One India Grand Prix, sending positive signals to the world automotive economy, auto sales have strangulated amidst high interest rates, towering fuel prices, the ever-depreciating rupee, coupled with the general economic slowdown. Some of the investments have also been held back in view of the uncertainty.

The Indian auto component sector, being predominantly dependent on domestic original equipment manufacturers (OEMs), is also facing a sluggish growth. Global OEMs are increasingly shifting to indigenous production to reduce rising imports bills due to the volatile currency market, which could provide the next growth avenue for component players. While global OEMs are becoming indigenous, exports to their group entities could also grow with the focus on quality and international standards. The finance minister could restore sops in the form of export-linked incentives for companies meeting international quality standards to increase competitiveness among players to exploit this opportunity.

On a macro level, the Indian economy is on the verge of witnessing major tax and corporate reforms with the DTC, GST and the Companies Bill just around the corner. The recently concluded meet of the state finance ministers signalled further delay in the implementation of the GST. On the direct tax front, while the ministry may take some more time working on suggestions of the standing committee, it is speculated that some key DTC proposals may find their way in this year’s Budget. If so, surprises may be avoided by considering stakeholder representations before introduction of the new provisions.

With partial deregulation of diesel prices in fiscal 2012-13, the price differential between petrol and diesel is decreasing, which could result in soft diversion of demand from diesel to petrol cars. Phasing out of subsidy on diesel prices is seen as a major setback for auto players who have already planned huge investments in diesel car manufacturing units. To arrest any further damage to these stakeholders, the government should hold its temptation for introducing an additional duty on diesel cars to discourage diesel usage for non-commercial purpose. The finance minister may drive his agenda on eco-friendly vehicles by granting investment-linked incentives. Steps for implementation of stringent emission norms and incentives on purchase of new vehicles complying with emission norms, support in form of reduced taxes on CNG/ LPG/ hybrid and other alternative-fuel vehicles would also entice people to buy eco-friendly vehicles. Further, thrust on allied sectors such as infrastructure and tourism would also supplement the development of the auto sector.

On the indirect tax front, measures such as 100% Cenvat credit on capital goods in the year of purchase, reduction in excise duty rates, refund of unutilised credit, specifically of SACD, on import of components for manufacturers on similar lines as traders and removal of unwarranted restrictions on input credit availability on closely-linked services would enhance the spirit of the manufactures. Elimination of customs duty on aluminum and alloy steel items would help the sector to combat cheap imports effectively. Interest on differential excise duty on subsequent price increase should be removed.

On the direct taxes front, measures such as higher tax depreciation rates for this capital-intensive sector, clarification on availability of weighted deduction on construction of test tracks, reduction of MAT rate would bring cheer to the auto segment. Higher depreciation rates would support the domestic capital goods industry as well. The introduction of domestic transfer-pricing provisions has taken forward India’s image as one of the toughest transfer pricing regimes. While the introduction of advance-pricing agreements was one of the key positives last year, long-awaited safe harbour rules may be introduced this year. Advance ruling facilities should be extended to resident taxpayers to bring desired certainty.

Though little, but the recent rate cut by the RBI has sent some positive vibes in market. A deduction under income tax for interest on vehicle loans would not only spur sales but would also increase the government’s revenue by way of taxes due to increased sales. The basic tax exemption limit may be aligned to Rs 3 lakh for individuals to enhance disposable income in lower- and middle-income brackets, which could stimulate demand in the sector.

With India’s global image already facing a dent for unstable tax environment over last few years, it is expected that issues that have been settled are not unsettled through retroactive changes. Definitive steps should also be taken for the introduction of DTC, GST, finalisation of tax accounting standards and the new Companies Bill, after considering suggestions provided by stakeholders to stabilise the tax and investment regime. This would help in consolidation of India’s position as a favourable destination for auto sector investment. However, one will have to wait and watch whether the finance minister takes the front seat to drive growth momentum of the automotive industry by unleashing some ‘out of box’ reforms.

The author is tax partner, automotive services, Ernst & Young. Views expressed are personal. Chetan Kakariya, senior tax professional, Ernst & Young, contributed to the article

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