Budget 2017: Auto sector eyes FM Arun Jaitley for booster shot

Indian automotive industry is one of the key drivers of economic growth—it accounts for 7.1% of national GDP. Strong backward-forward linkage and allowance of 100% FDI has attracted investment worth billions of dollars in the last few years. The Indian auto sector is ranked sixth-largest in the world, and is growing. Make-in-India, Automotive Mission Plan, and Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME) have been the key pillars of growth.

In addition, the government has focused on infrastructure development. It is now time to reduce the tax burden, especially when the government is targeting a 25% share in national GDP for the manufacturing sector.

The sector is subject to various indirect taxes at all levels in our three-tier tax structure, i.e. Centre (customs duty, central excise duty), state (state VAT, CST, motor vehicle tax) and local (road tax, entry tax). In 2016, the government imposed infrastructure cess (0-4%) and 1% tax collected at source on specified vehicles. In some variants of passenger vehicles, total indirect taxes alone go upwards of 50% of the sale value.

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The auto industry faces multiple issues—public transport versus private, diesel versus petrol versus electric & hybrid, pollution and safety issues versus cost of compliance of regulations, small cars versus big cars, and Make-in-India versus imports. Government policies, including tax policies, need to address these issues.

With the goods and services tax (GST) round the corner, the auto industry is not likely expecting too many changes in the current tax structure. However, the wish list includes:

•  Reduction in the number of excise duty rates;
•  Withdrawal of National Calamity Contingent Duty (NCCD);
•  Decrease in import duty for environment-friendly vehicles;
•  Incentives for replacing old cars; Multiple cesses to be removed.

Multiple tax rates

Central excise duty is charged at 6%, 12.5%, 24%, 27% or 30%, depending on the type and size of the vehicle, coupled with three rates of infrastructure cess, thus the number of duty rate combinations go up to 15. Such multiplicity of tax rates impact consumer preferences, putting plans of auto industry in disarray. Various industry associations have been representing to the government a two-rate structure—one for two-wheelers, three-wheelers, small cars, commercial vehicles, etc, and another for bigger/luxury cars.

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Withdrawal of the NCCD

The NCCD was introduced for specified commodities, including some motor vehicles, in 2003, to meet the needs of severe drought, and was supposed to be in force for a year only. However, successive governments have continued with it, without providing any particular reason to do so. Such a levy is an aberration in any value-added tax system and its withdrawal is a valid demand.

Environment-friendly vehicles

Electric and hybrid vehicles cause lesser pollution compared to conventional fuel vehicles. Currently, customs duty is charged at a high rate on the import of such vehicles; the industry expects lower tax rates for the same. To promote the manufacturing of electric vehicles in India, duty exemption on all parts used in the manufacturing of such vehicles is also sought by the industry.

Replacing old vehicles

One of the primary causes for the increase in pollution levels is the use of old vehicles, some of them in dilapidated conditions. The industry expects tax incentives for replacement of vehicles older than, say, 10 years.

Removal of multiple cesses

The auto industry is subject to various types of cesses, such as automobile cess and infrastructure cess, which are often not creditable freely. The computation of duty becomes a nightmare as each cess uses a different base value and computation methodology. The government can think of subsuming all these cesses under the central excise duty which is being currently levied.

The industry has its complexities, such as long investment cycle, intense competition, constraints imposed by infrastructure and regulations, long duration of vendor development, substantial outsourced processes, different approaches to market, etc. The complexity of the tax structure and the high tax burden add to the woes. While the auto sector is a good source of tax revenue for the government, the government can at least make the tax structure simpler. Constant tinkering with indirect taxes can affect consumer preferences, making some investments uncompetitive or even redundant. This increases wastage in the economy. With GST on the anvil, we need a tax structure that is kept constant for at least 5-6 years, so that auto companies can plan their investments better. That can help the economy as a whole and promote buoyancy in revenue.

In this context, the auto supply chain expects a simpler tax regime with all indirect taxes being subsumed in GST. The industry expects that the Union Budget should be a precursor to such a simplified regime.

The author is partner, Tax, KPMG in India. Views are personal