Budget 2020 India: GST rates for vehicles and its components should be reduced to 18 per cent from the current 28 per cent to help SMEs.
- By Sudhir Mehta
Union Budget 2020 India | GST and Taxation for MSMEs: The government’s Automotive Mission Plan 2026 targets triple industry revenues to $300 billion and expand exports sevenfold to $80 billion. It is thus expected that the sector could contribute more than 60 million additional direct and indirect jobs, which would result in improved manufacturing competitiveness and reduced emissions. To achieve this plan, the government needs to start by taking several bold initiatives in this year’s budget.
Reduction in GST Rates
Despite the auto sector being one of the largest contributors to the manufacturing GDP, India has one of the highest taxes for this industry. GST rates for vehicles are at the highest GST rate slab of 28 per cent with additional surcharge for various categories. Add to this, registration charges, surcharge, road tax etc., make the consumer pay anywhere between 40-45 per cent in terms of statutory payments before purchasing the vehicle. This is one major reason why the sector is facing a slump in demand.
GST rates for vehicles and its components should be reduced to 18 per cent from the current 28 per cent to help SMEs. There would be an initial impact on the government revenues but eventually would get neutralised due to increased demand leading to higher revenue. Implementation of lower GST should coincide with BS-VI implementation to offset part of the price increase.
The recent announcement made by the government of increasing the depreciation rate by 15 per cent for all types of vehicles purchased before March 31, 2020, as a temporary measure to revive growth is favourable to boost vehicle demand in the short term, especially vehicles meant for commercial use. However, it is proposed that the depreciation rate should be made 25 per cent which would equal to the real useful life of the vehicle and would help in further boosting demand.
To promote the sales of electric vehicles, the government has taken a positive step of announcing GST rate reduction from 12 per cent to 5 per cent, and income tax benefit on the interest component of the loan taken to buy an electric vehicle. These announcements would support demand for electric vehicles in the times to come. Additionally, the import of lithium-ion battery cells must be allowed at nil duty so that battery packs can be manufactured in the country and progressively cell manufacturing can also be established in the country. This would help in the creation of entrepreneurs, SMEs, jobs, and revenue for the states.
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Public Transport & Shared Mobility
India today has the lowest share of public transport at 7 per cent as compared to 30-35 per cent in most countries. Globally, there are hundreds of examples of how cities and countries can change for better when public transport is promoted, and the usage of personal vehicles is restricted. India is focused on promoting personal automobiles and has minuscule budgets to improve public transport systems. Add to the limitation in travel options available, commuting for most people in India is either uncomfortable or unaffordable. The budget needs to make a quantum jump in spending on public transport using smart city buses.
The shift from ownership to shared mobility will likely have a profound economic and environmental impact in the years to come, potentially saving the country thousands of crores of rupees just in fuel costs alone. Enabling shared mobility through regulatory reform and removal of permits will have a very strong positive impact on the environment and can lead to the creation of up to 10 million new jobs. The current contract and stage carriage laws are completely outdated and need to be changed to allow permit-free movement of passenger vehicles of all sizes.
Scrapping and Modernization
Old vehicles plying on the roads do not conform to the latest emission norms and hence cause pollution. Vehicles registered before March 31, 2005, should be removed from the roads. This will not only support demand generation but also help reduce pollution and combat climate change.
Introduction of scrappage centres and the proposed increase in re-registration of these vehicles by the Ministry of Road Transport and Highways will help in discouraging the use of vehicles beyond its useful life. A formal Incentive-based Scrappage Policy with monetary support from the government as well as manufacturers should be introduced. Incentive in the form of 50 per cent tax rebate in GST, road tax and registration charges are proposed. This will help in reducing pollution, combat climate change and drive higher demand.
In a nutshell, the government needs to focus on various aspects including tax relief, R&D, infrastructure, scrapping and modernization to boost the sector that contributes over 47 per cent to the manufacturing GDP of the nation. There is an urgent need to revive this sector and the government needs to take bold and quick steps in this year’s budget for the revival and survival of the auto industry.
(Sudhir Mehta is the CMD at Pinnacle Industries and Director at Force Motors. Views expressed are the author’s own.)