Opinion: Jaitley Should Consider Excise Duty Cut for Auto Sector

(Sarika Goel is Director, Tax & Regulatory Services, EY)

The automotive industry in India is one of the prime drivers of the Indian economy. It accounts for around 22 per cent of the country's manufacturing gross domestic product (GDP) and is one of the largest employment creators of the economy. However, in past few years the auto sector has witnessed a prolonged downturn with declining sales owing to high interest rates, pessimism amongst consumers, multiple vehicle recalls etc., which in turn have resulted in wafer thin margins and sluggish growth in the sector.

Considering the inherent potential of the industry and the challenges faced by it, the auto industry has pinned its hopes on government's 'Make in India' campaign, and some key expectations of the automotive sector from the Budget are as follows:

1) Reduction in tax rate on royalty/fee for technical services (FTS) paid to non-residents: Typically, in technical collaborations with overseas technology providers, tax on royalty/FTS payable under such agreements is borne by the payer companies and thus, the income tax rate of 25 per cent adversely impacts profitability for local manufacturer. Given the thrust of the government on 'Make in India' and need for technology to be absorbed domestically to achieve said objective, it is expected that the rate of withholding be reduced to the erstwhile 10 per cent.

2) Higher depreciation rate: In order for the automotive sector to increase manufacturing and thereby make India a manufacturing hub, it is imperative that they have the necessary funds to replace obsolete equipment. Accordingly, the automotive sector expects that the rate of depreciation on capital good be increased to 25 per cent from existing 15 per cent and for domestically manufactured capital goods to 40 per cent.

3) Broader scope of investment allowance: In order to increase capacity in the automotive sector quantum of benefit under investment allowance should be enlarged to include relevant land/building costs in addition to the plant and machinery. The existing provision should also be amended to allow the deduction in the year of installation rather than on the basis of meeting combined test of "acquisition and installation".

4) Impetus to in-house and third party R&D: Research and development is an integral part of auto industry and, therefore, the benefit of weighted deduction should also be extended to third party R&D service providers to encourage local designing of products. Cost of land/building for setting up R&D facility should also be included in existing R&D deduction. Further, the allowance for weighted deduction under Minimum Alternative Tax regime should be prescribed. It would also be useful to clarify the expenses such as development expense of prototype expense and road constructed for test track etc. are eligible for weighted deduction. Further, the government must roll out some sops from an indirect tax perspective such as exemption from customs duty on goods required for R&D purpose.

5) Corporate Social Responsibility (CSR) expense: CSR expenditure, irrespective of whether specifically allowed or not, should be allowed as a taxable deduction.

6) GAAR deferment: From an investor perspective it is expected that the government will defer the provisions of GAAR.

7) Reduction in excise duty rates: The roll-back of sops with effect from January 1, 2015 resulting in increase of excise duty from 8 per cent to 12 per cent for small cars, motorcycles, scooters, from 24 per cent to 30 per cent for commercial vehicles and SUVs and from 24 per cent to 27 per cent and 20 per cent to 24 per cent for large and medium segment cars respectively, has again pushed the prices up by Rs.10,000 to Rs.40,000 and left the industry reeling under pressure. The government needs to re-visit its position vis-a-vis the excise duty rates for auto industry and reduce the rates to the same levels as existing prior to January 1, 2015 in order to rescue the sector from a situation of de-growth.

8) Early implementation of uniform GST regime: GST is expected to provide a boost to manufacturing and exports through increased competitiveness in the international market, and the auto sector is keenly looking forward to announcement of the government's commitment to early introduction and a clear roadmap to GST.

9) Faster implementation of the National Electric Mobility Mission Plan ('NEMMP') for 2020: The NEMMP would provide incentives to the tune of approx. Rs. 14,000 crore for promotion of cleaner electric vehicle technologies in India. The scheme aims to encourage faster adoption, domestic technology development and manufacturing of full range of cleaner electric vehicle technologies that include mild hybrid, full hybrid vehicles, plug-in hybrids and pure electric vehicles, thereby leading to creation of a strong, globally competitive, viable and self-sustaining EV industry and its eco system in India. The Mission Plan 2020 envisages demand incentive scheme for faster adoption of Electric Vehicles. An inclusive approach has been proposed in the scheme and all vehicle segments come under the purview of the incentive scheme, along with the complete range of electric and hybrid vehicles (mild, strong, plug-in, BEV variants are covered).

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