EU FTA: Cars may not see sharp cut in customs duty

Written by Arun S | Roudra Bhattacharya | New Delhi | Updated: Mar 30 2013, 15:07pm hrs
CarIndia may not offer European Union a sharp customs duty cut to 10-30% for imported premium cars. (Reuters)
In a move that could spell relief for the domestic auto industry, India may not offer the European Union (EU) a sharp customs duty cut to 10-30 per cent for imported premium cars as previously envisaged under the upcoming free trade agreement (FTA).

Instead, the levy is likely to be around 50-60 per cent, which is half of the 100 per cent basic customs duty currently levied on all completely-built unit (CBU) car imports, senior government officials said.

This follows around two years of lobbying by domestic auto makers, and demands from Praful Patel, Minister for Heavy Industries, who argued that any sharp cut in import duties would slow down fresh investments and job creation by global auto makers in India. EU, which is in the midst of an economic slowdown, would prefer to export to India instead, they said.

With such a strategy in mind, in the Budget 2013-14 announcements finance minister P Chidambaram had proposed to increase the duty on high-end motor vehicles from 75 per cent to 100 per cent.

The stated logic behind the duty hikes on imported high-end motor vehicles and motorcycles may have been to garner additional revenue from the affluent class. However, the move is also intended to protect Indian manufacturers from the possible adverse impact of any FTA, encourage domestic production of these luxury vehicles as well as to generate employment locally, a finance ministry official said.

He added, The move (to hike duties) was also influenced by representations from domestic makers who had expressed apprehensions of duty concessions on these items in FTAs adversely impacting their plans to manufacture such vehicles. While taking the final decision, the finance minister took into account the views of all stakeholders.

This plan hopes to keep both the domestic auto industry and EU trade negotiators happy. For automakers, the import duty remains at the same level as before (2009), while EU would get a drop in customs duty from the current rates and become more competitive versus other nations like Japan and US. Commerce minister, Anand Sharma, recently said that the India-EU FTA would be finalised by mid-April at a top-level meeting in Brussels.

If this is the strategy of the government, then we are in full support of such a move. All we want is that the customs duty rate should be kept at 60 per cent and it should be the same level for all countries, an auto industry official said.

However, another industry source added that this strategy of the government may face a challenge if the EU insists on a base date clause, which says that any duty cut offered today will only apply to the customs duty rate prevalent in 2007-08 when the negotiations first started - any increases after that date are immaterial. In 2007-08, the basic import duties on CBU car imports was 60 per cent, but in 2012 this was increased to 75 per cent for luxury cars (priced above $40,000). Subsequently in February this year, it was further hiked to 100 per cent.

An official from the heavy industries ministry said, In our requests before the Budget, we had asked for a stable customs duty scenario and no change in the present duties. There should also be no reduction of customs till the current Automotive Mission Plan (AMP) is completed by 2016-17, and the commerce ministry has assured us that the EU FTA will only be enforced by that same time and not before. Though the EU had initially batted for zero duties for fully-built car imports under the FTA, India had reportedly offered only a cut in the basic duties to about 30 per cent.

European Union, Free trade agreement, Indian manufacturers