EU FTA: No sharp duty cut to bring relief for motown

Written by Roudra Bhattacharya | New Delhi | Updated: Mar 30 2013, 06:16am hrs
In a move that spells relief for the domestic auto industry, India may not offer the European Union (EU) a sharp customs duty cut to 10-30% for imported premium cars as previously perceived under the upcoming free trade agreement (FTA). Instead, the levy is likely to hover around 50-60%, which is half the 100% basic customs duty currently levied on all completely-built unit (CBU) car imports, senior government officials told FE.

This follows around two years of lobbying by domestic automakers and Praful Patel, Union minister for heavy industries, who argued that any sharp cut in import duties would slow down fresh investments and job creation by global automakers 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 Budget 2013-14 finance minister P Chidambaram had proposed to increase the duty on high-end motor vehicles from 75% to 100%. 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 manufacturers 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 it was in 2009, while the EU would get a drop in customs duty from the current rates and become more competitive versus other nations like Japan and the 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% 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%, but in 2012 this was increased to 75% for luxury cars (priced above $40,000). Subsequently in February this year, it was further hiked to 100%.

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%. However, analysts say that the government may increase it further and take a tougher stand largely as a response to several recent measures taken by EU member nations to tighten trade and immigration norms.

Among top concerns, the EU is yet to give a data secure tag to the domestic IT/BPO industry, without which Indian firms will find it tougher and more expensive to get European clients. India had demanded greater access to the EUs services markets, especially a greater number of visas for skilled professionals, but EU interior ministers are reportedly discussing ways to tighten visa norms instead. EU had also been asked to scrap the economic needs test (ENT) to ensure smoother movement of professionals. Under the ENT regime, foreign service providers need to prove that they are not harming their EU competitors and can be denied entry on the same basis.