Union Budget for automobile industry: Few hits, few misses

The automotive industry has, by and large, reacted positively to the Budget. It looks forward to long-term gains even though there have been short-term pains

By: | Updated: March 21, 2016 12:46 PM

The Union Budget FY16 has been a mixed bag for the automobile industry. The industry has been bearing the brunt of multiple taxes and had made various representations, including those for a reduction in the excise duty rate, to help the industry tide over the difficult business environment which it has been facing, and especially so in the last couple of years. While the proposals may not have met the requirements of the industry in terms of immediate tax cuts, the thrust on infrastructure growth and the movement towards GST by April 2016 are reasons for optimism. The outlay of R70,000 crore on infrastructure, including 1 lakh km of road construction for 2015-16, and the concrete timeline of April 2016 announced for GST, will be a big positive if implemented.

The basic customs duty on import of commercial vehicles has been increased from 10% to 20%, presumably with a view to boost local manufacturing. There have been some variations in the excise duty rates, primarily on account of removal of education cess of 3%, and also on account of the marginal increase in the rate from 12% to 12.5%. This has resulted in a slight increase in the excise duty of smaller cars and vice-versa for other cars including luxury cars.

mixed-bag

Electric vehicle manufacturers have a few things to smile about, since the finance minister has earmarked R75 crore for faster adoption and manufacturing of electric vehicles in 2015-16, a step which is termed as a good beginning. The concessional excise duty of 6% on specified goods (such as battery pack, battery charger, power control unit, etc), which currently exists, has been extended up to March 31, 2016.

On the corporate tax side, the phased reduction in the rate of tax from 30% to 25% over four years is welcome. Abolition of wealth tax is also a step in the right direction, although the actual costs on account of this tax were not very significant in many cases.

Another welcome step is the reduction in the rate of tax withholding under the domestic tax law from 25% to 10%, on payments made to non-residents for royalties and fees for technical services. However, there have been no specific steps to tackle the mounting tax litigation which the industry faces, especially on transfer pricing matters. Lack of clarity on various transfer pricing issues continues to be a concern, and it does appear that APAs are the only way to have a permanent solution around these.

For the automobile industry the Budget can be regarded as one with a few hits and a few misses. The reaction of the industry has been by and large positive, with hopes of long-term gains but some short-term pains.

By Dinesh Supekar

The author is partner, Price Waterhouse & Co LLP. Views are personal

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