Budget 2014: What the government can do to give auto industry the much needed push
Tax Partner- Automotive Practice, EY
Associate Director - Tax & Regulatory Services, EY
The automobile industry in India has been experiencing a difficult phase with plummeting growth rates in overall volumes and even a negative growth in cars and CV segments being witnessed by the industry since 2012. While the Industry has seen an upswing in sales for the first time in May 2014 in almost past 15 months (excluding August 2013), it seems to be just coming out of one of the worst slowdown in a decade and the industry would need focussed measures to ensure that it remains on a smooth recovery path.
In line with the expectation of the auto industry, the Government has extended the validity of the reduced excise duty rates on specified products (including automobiles) beyond 30 June 2014 till 31 December 2014. This is a welcome move and would enable the auto manufacturers to sustain reduced prices that were announced by many industry players as a result of the relief granted in the interim budget.
The key reasons for the decline in the industry growth rate are economic slowdown, rising fuel prices and high interest rates, which have in turn led to an overall negative consumer sentiment. The need of the hour for the Government is to take concrete steps to bring out the Indian economy from the turmoil it has been facing over the past few years. While the recently announced rollback of railway subsidy, thereby increasing the railway tariff appears to be a step in that direction, implementation of the major tax reforms like introduction of Goods and Services Tax (GST) regime and Direct Tax Code (DTC) also needs to be accelerated. GST would not only simplify the complex indirect tax structure in India but would also result improving the credit chain, eliminate cascading effect of taxation, which inturn will help in reduction of the price to the consumers. DTC would bring in the much need simplification of the corporate income tax structure in India.
Implementation of the above-mentioned reforms cannot happen overnight. Accordingly, certain interim measures such as elimination/reduction of the customs duty on raw materials and components, rationalization of CENVAT Credit Rules (specifically with respect to removal of restrictions imposed in the definition of input services) would also help in bringing down the manufacturing costs, which would ultimately result in reduction of price for the ultimate consumers.
Some of the other factors that could help in maintaining and further promoting the recent increase in the footfalls at the auto dealerships are reduction in interest rates on automotive loans, allowing deduction of interest being paid on car loans for salaried individuals and reduction in fuel prices costs. Higher depreciation rates on cars/ CVs could also boost the demand further.
In addition to the above, introduction of measures like fleet modernization and scappage policy with introduction of policies to incentivize replacement of old vehicles would also help in increasing demand in the auto sector, while increasing the indirect tax revenues for the government.
Despite going through challenging times for the last couple of years, the long-term potential of the Indian auto industry cannot be doubted. India is, today, one of the largest auto markets in the world. The industry players also recognize this and the same is clear from the fact that despite the recent weakness experienced by the sector, most of the industry players have expansion plans for India.
However, in order to ensure that the industry is able to derive its full potential, it would require support from the Government in the nature of growth oriented policies such as increase in depreciation allowance on capital goods to 25 per cent, higher depreciation on domestically manufactured capital goods (say 40 per cent), extension of the 200per cent weighted deduction available on in-house research and development ('R&D') activities to outsourced R&D activities (to approved institutions ie, National Laboratories, Universities, Scientific Research institutes and IITs).
Further, in order to establish India as the export hub for the auto industry, additional export related incentives such as increase in duty drawback rates for the automobile sector, inclusion of automobile sector under the special incentive schemes (like focus product scheme) also need to be considered as these would help in exports from India being more and more competitive.
With one of the biggest slump in the Indian auto industry expected to have been bottomed out, support from the Government in the right areas would go a long way in giving the push it needs to come out of the woods completely!
Views expressed are personal