Published Editorial

Economic Growth Agenda in Budget to Drive Auto Sector

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Chetan Kakariya

Senior Tax professional, EY

The Narendra Modi led government had already provided pre-budget cheer to the auto sector by continuance of excise duty cut till December, and has now provided a huge respite from recent spurt in valuation related enquiries on the basis of Fiat ruling. It has proposed to compute excise duty on transaction value even if such sale price is lower than the manufacturing cost, provided there is no additional consideration flowing from buyer to manufacturer directly or through third party.

The amendment is prospective in nature and ideally, this was one change where retrospective amendment would have been welcome with open arms. Further, cheers have been brought by extension of direct tax incentive in the form of 15 per cent investment allowance till 31 March 2017 and reduction in threshold for investment in plant and machinery from Rs. 100 crores to Rs. 25 crores. Simultaneous extension of the concessional rate of tax on overseas borrowing and bonds till 30 June 2017 should fund new investments. Let's have a closer look at offerings for Auto sector in the budget.

The budget speech has provided welcome mission statements to boost the manufacturing sector, thrust on PPP model for infrastructure sector, strengthening of transport network - air, water and road, development of smart cities, etc. The manner and speed of implementation of these would decide the fate of the mission statements.

Widening the FDI net, development of industrial corridors, focus on infrastructure sector could create job opportunities and in turn can stimulate the overall demand including demand for the auto sector. Improvement in transport network should benefit by way of reduction in transport cost/ time. Significant investment in road network and more expressways, development of smart cities, FDI relaxation for real estate sector would not only result in demand revival for construction vehicles but would also indirectly push passenger and commercial vehicle sales.

Finance Minister has expressed his commitment for a stable and predictable taxation regime that would be investor friendly. Though there is a disappointment that the retrospective amendments have not been done away; the need for exercising extreme caution and judiciousness while proposing any retrospective amendments has been acknowledged. Further enlarging the scope of advance ruling to residents (subject to thresholds), strengthening of AAR and APA administration, high level committee for regular interaction with industry and providing clarity on contentious issues are some of the key strategic aspects that would go long way in restoring the investor confidence.

Other measures such as single window platform across the government department and ministries, export promotion mission related initiative etc. should contribute in improving the ease of doing business in India and thereby support the prime goal for overall economic growth benefiting all sectors, including the auto sector.

The auto sector's demand for enhanced port connectivity, automatic rebate for return load, setting up of private freight terminals and logistics parks under PPP mode has been addressed in the Railway budget.

On the flip side, potential subsidy for green vehicles, fleet modernisation and scrap-page policy have not come through. In absence of allocation of funds for the National Electric Mobility Mission Plan, companies who have significantly invested in development of electric vehicles would grapple with low demand. Denial of deduction of corporate social responsibility expenditure is disappointing.

Increase in the basic tax exemption limit for the individuals, deduction for interest on housing loan coupled with measures to hike savings such as increase in deduction limit available under section 80 are likely to help buyers looking for entry level cars and two-wheelers.

Amid a slew of measures aimed at bringing a predictable taxation regime, the Finance Minister announced certain positive changes on transfer pricing front like rollback of APA, permissibility of multiple year data and proposed introduction of range concept for determination of arm's length pricing. These should in the long run help significantly reduce transfer pricing litigation.

On the indirect tax front, exemption on parts of tractors removed from one or more factories of a tractor manufacturer to another factory of the same manufacturer for manufacture of tractors should provide some relief to the auto industry. Further the reassurance regarding implementation of GST should raise the hopes.

On the flip side, some changes like increase in basic customs duty on stainless steel flat products increase in interest rate in case of delay in deposit of service tax, credit being disallowed unless availed within 6 months from the date of issue of the invoice bring in negative sentiments. Mandatory pre-deposit of duty and/ or penalty demanded would block the funds of business. Further, long pending demand for rationalisation of inverted duty structure has also not found its way in this year's budget.

Though overall there is not much in the budget specifically for auto sector, the new government's industry friendly outlook should hopefully provide automotive industry a new lease of life.