Union Budget FY22: Automotive sector needed more support

Would a reforms Budget provide the necessary boost to the auto sector? Specific demands such as income tax deduction for R&D expenditure and reduction in GST rates remain unattended; auto sector now awaits faster roll-out of the PLI scheme and scrappage policy.

February 6, 2021 8:08 AM
However, registration data is expected to show a double-digit rise, reflecting sales during the festive season.

By Waman Parkhi

The Union Budget FY22 attempts to be a ‘Reforms Budget 2.0’. It not only talks of disinvestment, but also speaks of the government getting out of most of the sectors and even from the four core areas identified for government presence. That is a huge change in mindset long after the disinvestments we saw in early 2000s. The finance minister used the word ‘privatisation’ of public undertakings (para 9 of her speech) which alone sets this Budget apart. The government’s resolve to monetise its assets right from roads, airports, transmission lines and pipelines to railway assets and stadia speak of a government that values efficiency of the economy over control. With ’no new taxes’ despite Covid-19 pandemic and a contracted economy, this Budget creates a positive sentiment for the economy to grow and with that for the automotive sector that contributes to half of industrial GDP.

Production-linked incentive (PLI) schemes were earlier announced for 13 sectors, including automobile and auto components, which would be the biggest beneficiary of PLI, with a proposed outlay of Rs 57,042 crore (almost 30% of the total PLI outlay). The scheme is under discussion and would be in public domain soon. The biggest win for the auto sector is the announcement of the much-awaited scrappage policy, for phasing out old and unfit vehicles. As part of this, personal vehicles would undergo fitness tests after 20 years and commercial vehicles after 15 years. Besides contributing to lower emissions and improving safety on the roads, it would also uplift demand for vehicles. The policy is being implemented on a voluntary basis at present.

The scrappage policy would also have a spillover impact on auto component manufacturers. Those who supply majorly to OEMs would see a spurt in sales, while those catering only to after-sales market may see a dip as the requirement of spares will reduce. The same will be the impact on the services sector and workshops. Scrap generated will positively impact steel prices, which have heated up substantially in the last six months. Moderation of steel prices, in turn, will have a positive impact on components industry, which uses a lot of steel. Scrappage of old internal combustion engine (ICE) vehicles would open up opportunities for new electric vehicles (EV), and that will have a cascading impact on the components industry, as EVs have much fewer parts. The impact of the scrappage policy will, therefore, be complex and not as linear as it appears to be.

As part of the government’s Atmanirbhar Bharat vision, customs duty rates on certain auto parts (safety glass, electrical lighting and signalling equipment and goods such as lithium-ion cells) have been enhanced to promote domestic manufacturing. In the short run, this may result in additional cost burden for the sector, but in the medium to long run it should lead to increased value addition and localisation in the country. It may also lead to reduction in litigation due to rate parity among auto parts.

The Budget lays importance on improving ease of doing business, trade facilitation, digitisation and growth of MSMEs. Key features of tax proposals that deserve a mention are removing mandatory requirement for getting annual accounts audited, reduction in time for income tax proceedings, constitution of a dispute resolution committee, faceless income tax tribunal, etc. Auto component manufacturers are likely to benefit from these.
While there are no direct incentives for EVs, the proposed outlay for clean air of Rs 2,217 crore for 42 urban centres with a million-plus population could be used for spreading awareness on EVs. The outlay of Rs 18,000 crore for public buses could be used for electrification of public transport and may help in boosting demand for commercial EVs.

Overall, the Budget is a mixed bag for the automobile industry with the announcement of the scrappage policy, tax facilitation measures and some increase in customs duty on components. Even before Covid-19, the sector was suffering on account of low demand, change in emission norms, etc. While the industry has exhibited signs of recovery in Q3 of FY21, it expected more support from the government for a speedy recovery. Some specific demands such as income tax deduction for R&D expenditure and reduction in GST rates to make vehicles more affordable have remained unattended. However, if the increased government spending translates into increased consumption, the benefit should percolate to the auto industry. Meanwhile, it awaits faster roll-out of the PLI scheme and the scrappage policy.

The author is partner, Indirect Tax, KPMG in India

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