Published Editorial

Proposals in Budget 2014 are a mixed bag for the auto industry

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Economic times


Vinesh Kriplani

Tax Partner, EY

Contributed by:

Rinku Nehra

Associate Director-Tax & Regulatory Services, EY

With the Indian economy going through tough times for the past couple of years, everybody had high expectations from the maiden Union Budget of the newly formed NDA Government. The Automobile Sector was no exception to the above and it was expecting focussed measures to sustain its recent recovery trends.

As against the expectations, the proposals in the current budget seem like a mixed bag for the auto industry.

Post the flurry of retrospective amendments and strong tax collection related currents in past few years, there was a negative sentiment in investor community leading to overall slowdown in the industrial as well as GDP growth. However, Government's acknowledgment on the need for exercising extreme caution and judiciousness while proposing any retrospective amendments, need for reducing the alarming levels of litigation, widening and strengthening of advance ruling mechanism for tax residents of India, proposal to set up High Level Committee to regularly interact with industry on areas requiring clarity and issue clarifications on the same are some of the key directional announcements that should help in rebuilding the confidence levels of investor community. This should give a positive boost to the auto sector as well.

A series of measures have been taken for industrial growth and in particular, manufacturing sector such as thrust on development of various industrial corridors, proposed development of smart cities, single window platform across the government department and ministries, export promotion mission related initiative, etc. The thrust manufacturing sector should promote job creation opportunities and help in increasing the overall demand including demand for auto sector.

Infrastructure and particularly, transport network is an important cornerstone of the economy and the budget seems to have considered the needs of the sector. Development of roads including specific attention to expressways for industrial corridors and PPP model for various infrastructure projects should boost the demand for both passenger and commercial vehicles. Development of various ports, inland waterways, etc should encourage water transport, a cheaper means of transportation to the auto industry. The recommendation of the Auto Industry for enhanced port connectivity, automatic rebate for return load and setting up of private freight terminals and Logistics parks under PPP mode has also been accepted by the Railway Minister.

However, there has been no announcement regarding the allocation of funds for the National Electric Mobility Mission Plan, which could cause a setback for companies, who have invested a considerable amount of resources for the development of electric vehicles. Electric vehicle makers were demanding that the customer buying an electric vehicle should be given subsidies, which will help in promoting and using environment friendly source of energy for mobility.

While there have been no auto industry specific changes from a direct tax perspective, proposals like increase in the basic tax exemption limit for the individuals, increase in deduction limit available under Section 80 C, deduction for interest on housing loan, will result in a slight increase in disposable income, which may inturn help the auto sector by increasing the demand for passenger vehicles.

On the indirect tax side, the Government's recent move to extend the validity of the reduced excise duty rates on specified products (including automobiles) by 6 months till 31 December 2014 brought some cheer to the auto Industry. However, apart from the above no major changes have been made to further boost the industry except for 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.

In fact some of the 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, could result in increase in manufacturing costs. Separately, introduction of requirement for mandatory pre-deposit (7.5% and 10% of the duty demanded or penalty or both) would give rise to blockage of working capital.

Further, the other key expectations of the industry such as simplification of excise duty structure, introduction of a uniform excise tariff rate for automobiles, reduction in customs duty rates on raw materials, introduction of measures like fleet modernization and scappage policy, policies to incentivize replacement of old vehicles and increased depreciation allowance with additional depreciation for domestically manufactured goods, seem to have been left unfulfilled.

The only measure which may provide some respite to the auto industry from the recent spurt in valuation related enquiries from the excise department is the introduction of a provision to negate the Fiat Ruling by clarifying that so long as there is no additional consideration flowing from the buyer to the manufacturer directly or through any third party, transaction value (being the sale price of the goods) would be considered for the purpose of computation of excise duty even if such sale price is lower than the manufacturing cost and profit.

While the statement by Hon'ble Finance Minister in his today's budget speech providing a commitment for a stable and predictable taxation regime that would be investor friendly set the agenda of the Modi government, the auto industry was left grappling for specifics.