Budget 2018: Auto industry’s expectations

With the automotive industry being one of the prime drivers of the Indian economy that accounts for seven percent of the country’s GDP, automobile companies, experts and consumers are all waiting for the Union Budget 2018.

The government of India is all set to present the Union Budget 2018. Automobile players, auto experts and consumers are all waiting for the budget with bated breath. This budget is very crucial for the automotive sector considering the impact of so many reforms during the past year by the Government including policy changes relating to diesel automotive, implementation of GST, etc.

The automotive industry is one of the prime drivers of the Indian economy accounts for around 7% of the country’s gross domestic product (GDP), comprising approx. 23.9 million vehicles, which includes passenger vehicles, two-wheelers, commercial vehicles and three-wheelers. The automotive industry also provides direct and indirect employment to over 29 million people in India. The automotive sector is looking forward to support from the Government to further boost the industry through Union Budget 2018.

With automobile manufacturers investing heavily in R&D to upgrade to BS VI emission standards, e-mobility, etc, incentives on R&D in form of weighted tax deduction from 150% to 200% should be restored in Union Budget 2018. Keeping in perspective the Government of India’s initiative of Make in India and the fact that R&D is an integral part of auto industry and key factor for enabling manufacturing and innovation in India, weighted deduction on R&D expenses should be extended to expenses incurred towards third-party R&D service providers so as to encourage local designing of products. The rate of depreciation on capital goods should be increased to 25 percent from existing 15 percent so as to enable replacement of obsolete equipment and allow state of the art equipment be used for making India a manufacturing as well as an export hub for the automobile industry.

To incentivize the generation of more employment by the companies, the benefit of the deduction for additional employment benefits, currently available only if the employee completes 240 days in a financial year should be extended to the year in which the employees complete the prescribed threshold period of employment. To provide a boost to demand and keeping in mind the environmental concerns, Government should give tax incentive/ cash support to existing vehicle owners to give up their old vehicles (aged 10 years/ 15 years or more). To further boost manufacturing in India, it is hoped that the Union Budget 2018 also includes a reduction in the corporate tax rate coupled with the rationalisation of the Minimum Alternate Tax rate and provisions.

It is also imperative to examine the policy changes that the Government of India could undertake in the Union Budget 2018 with the regards indirect taxes that pertain to the automobile sector. Fixing the custom duty at a uniform rate of 10% for all auto components in lieu of the current regime which provides for different rates on different components and the countries of origin would be welcome. With respect to GST, currently, auto components attract two different rates- 18% and 28%. Although some relaxation has been given to auto components after the recent GST council meeting, still nearly 40% of the auto components attract a higher GST rate of 28%. Hence, GST at a uniform rate of 18% across all product categories in the auto component sector should be proposed. This will boost the morale of local auto component manufacturers as well.

For electric vehicles (EVs), an extension of custom duty concessions for additional critical components such as lithium-ion batteries, electric motors, etc. would be a welcome step. Further, GST on such automobiles should be reduced to 5% in the Union Budget 2018, besides allowing one-time income tax deduction of 30% of vehicle price for non-financed buyers. To support ‘Make in India’ programme any custom duty concessions to CBUs (completely built units) of electric vehicles may be reconsidered and clarity on the definition of CKD (completely knocked down)/ SKD (semi-knocked-down) units of electric vehicles should be provided.

Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India (FAME India) Scheme announced by the Government aims to encourage faster adoption, domestic technology development and manufacturing of full range of cleaner electric vehicle (EV) technologies, thereby leading to creation of a strong, globally competitive, viable & self-sustaining EV industry and its ecosystem in India. Given that the industry is putting significant focus on developing world-class EV and Hybrid vehicles suited to Indian markets, the Government should increase the allocation in the Union Budget 2018 under FAME 2 to promote green mobility.

The automobile industry is key industry from the perspective of the nation’s Gross Domestic Product. It can continue to contribute significantly and more, with the continued support of the Government. Thus, it is hoped that Government takes into consideration the above asks and provide an impetus to the automotive sector while announcing the Union Budget 2018.

Author: Gaurav Karnik is a Tax Partner, Automotive practice at EY India.

Disclaimer: The views and opinions expressed in this article are solely those of the original author. These views and opinions do not represent those of The Indian Express Group or any employees.

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